Henry's Restaurants of Pomona, Inc. v. State Bd. of Equalization

• Decision Date: 05 March 1973
• Court: California Court of Appeals Court of Appeals
• Parties: HENRY'S RESTAURANTS OF POMONA, INC., et al., Plaintiffs and Respondents, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Appellant. Civ. 39970.

Page 867

106 Cal.Rptr. 867

30 Cal.App.3d 1009

HENRY'S RESTAURANTS OF POMONA, INC., et al., Plaintiffs and Respondents, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Appellant.

Civ. 39970.

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

March 5, 1973.

Hearing Denied May 16, 1973.

Evelle J. Younger, Atty. Gen., Philip C. Griffin, Deputy Atty. Gen., for defendant and appellant.

Fizzolio & Fizzolio, North Hollywood, and Rubenstein & Hawkins, San Francisco, by James M. Fizzolio, North Hollywood, for plaintiffs and respondents.

COMPTON, Associate Justice.

In these five consolidated actions certain restaurant owners (plaintiffs) sought to recover sales taxes paid under protest on sales claimed by them to be exempted by section 6359 of the Revenue and Taxation Code.

Each plaintiff conducts an eating establishment which combines the usual 'sit down' restaurant operation with a 'car-hop' drive-in restaurant. These establishments sell prepared food for consumption on the premises as well as for 'take out' or 'to go' orders. Each operation provides parking spaces for patrons with certain spaces reserved for drive-in customers and the remainder set aside for restaurant patrons.

At the time of commencement of the actions, Revenue and Taxation Code section 6359 generally exempted from taxation 'food products' for human consumption but excluded from the exemption the following situations:

'(a) when the food products Are served as meals on or off the premises of the retailer, Or (b) when the food products Are furnished, prepared, or served for consumption at tables, chairs, or counters or from trays, glasses, dishes, or other tableware whether provided by the retailer or by a person with whom the retailer contracts to furnish, prepare, or serve food products to others, Or (c) When the food products are ordinarily sold for immediate consumption on or near a location at which parking facilities are provided primarily for the use of patrons in consuming the products purchased at the location, even though such products are sold on a 'take out' or 'to go' order and are actually packaged or wrapped and taken from the premises of the retailer, or (d) When the food products are sold for consumption within a place, the entrance to which is subject to an admission charge, except for national and state parks and monuments, . . ..' (Emphasis added.)

The California State Board of Equalization (the Board) appeals from a judgment for plaintiffs which decreed inter alia that section 6359(c), together with the Board's manner of administration thereof, is unconstitutional as a violation of the Fourteenth Amendment to the United States Constitution, and article I, section 13 of the California Constitution in that it was unconstitutionally vague and arbitrarily and unreasonably discriminated between drive-in food service establishments and conventional restaurants.

Subdivision (c) was added to the statute in 1963. Prior to 1963, exemption from the tax was denied only to products served as meals either on or off the premises of the retailer, or drinks or foods furnished, prepared or served for consumption at tables, chairs or counters or from trays, glasses, dishes or other tableware provided by the retailer. Thus both the typical restaurant sale and the typical drive-in sale were taxed alike. On the other hand, sales of 'take out' food by any type of food establishment, including a drive-in, were exempted from tax.

As early as 1953, the Board noted that the activities and serving methods of drive-in food establishments were changing. The drive-in with the familiar 'car-hop' and window tray was giving way to an operation where the customers would obtain the food from a window or counter and return to their cars to eat or drive off to eat elsewhere. Often times this food would be served with paper and cardboard tableware.

The Board took the position that there was no basic difference, insofar as sales tax was concerned, between the traditional drive-in and these newer self-service operations. Thus on November 12, 1953, the Board issued a General Sales Tax Bulletin which declared that a retailer operating a 'drive-in' or similar establishment was subject to the sales tax if the food was consumed on or adjacent to the premises whether in an automobile or otherwise, or if he provided food for consumption from disposable tableware regardless of where the consumption occurred.

Later, in the next month, General Sales Tax Bulletin interpreted the previous bulletin to apply only to a drive-in or similar establishment. The key factor in the definition of a drive-in was the availability of parking space for the use of patrons who there consumed the food and drink purchased at the establishment. Excluded from the application were 'drive-in theatres, mobile lunch wagons, establishments catering only to walk-up trade, sellers exclusively of box lunches or food in cartons or other containers for consumption away from the premises, stands in markets or stores, even though some patrons may consume food purchased in cars parked in parking areas maintained by the market or store for its general patrons, and establishments fronting on a public street where patrons may park their cars at the curb and consume the food purchased, but which parking space is available to the public and is not under the control of the operator.'

Under this bulletin operators of the affected drive-ins were still exempt as to 'take out' food which was consumed away from their premises and for which no tableware, etc., was furnished. Such exemptions could only be claimed, however, by furnishing either sales checks or receipts or some other adequate auditable record.

Following the promulgation of these bulletins, according to the Board, there was widespread confusion in the drive-in world. Operators were unable to substantiate their exemptions for 'take out' sales because customers refused to cooperate. Not only did some customers protest sales tax but adopted means of thwarting its collection. The ordering of food-to-go (tax free) followed by consumption of the food on the premises became a common event.

Certain retailers collected tax on all sales and claimed no food deduction. This resulted in complaints by legitimate 'take out' customers that they were being taxed on tax exempt sales.

Audits by the Board were abetted by observations of sales at test locations. An estimate of tax liability was then based on these tests. Those operators who had an inadequate recording system for recording 'take out' sales were penalized when they could not substantiate sufficient 'take out' sales to meet the percentage set by the auditors' test results.

Some retailers elected to pay sales tax based on their own estimates of 'take out' sales only to have their estimates rejected by the auditors. Aside from difficulty in record keeping, many operators could not determine at the time of delivery whether a customer would consume the food on the premises or drive elsewhere. This was particularly true with the 'drive-through' drive-in where customers would drive up to a window, collect their food and then either leave the area or decide to park in one of the parking spaces provided on the premises. Apparently inquiry of the customer's intent proved futile in many cases or was obviously impractical in the rush of business.

As an answer to the problem described by the Board, the Legislature in 1963 enacted subparagraph (c) of section 6359, Supra. In addition to the previous conditions of taxability, i.e., service of meals or the furnishing of food products for consumption from tableware, the Legislature added another, the availability of parking facilities for the use of patrons in consuming the products purchased at the location when those products were capable of immediate consumption.

Thus certain types of 'take out' food, whether consumed on the premises or not, were taxable if purchased at a drive-in type of operation but were not taxable if purchased at a conventional restaurant or an establishment without parking facilities. Herein lies the crux of plaintiffs' complaint of discrimination.

The Board did take cognizance of the problem of the sale by drive-ins of food in quantities and in a form obviously not intended for immediate consumption, and adopted the policy that taxation of such items as ice cream in pints, milk in quarts, bags of dozens of hamburgers, whole pies and cakes, etc., was not intended by the statute and would improperly discriminate in favor of bakeries, restaurants or other retail food outlets. The Board sought to solve this problem by a ruling setting forth a 'bulk sale' test which permitted the drive-in operator to claim an exemption for sales of food in bulk containers or in a quantity obviously not intended for consumption on the premises.

The specific dimensions of a sale in bulk were not spelled out in the Ruling, but were instead left to the discretion of the Board's field staff which was presumably better able to gauge a bulk sale by observation of each individual operation and the circumstances under which the sale was made.

While in practice bulk sales were tested by various formulae in the several Board districts throughout the State, the statewide requirements as to what constituted acceptable records to support a tax exemption were specifically and uniformly established by a general tax bulletin published by the Board.

We start with the proposition that the statute comes before us clothed with a presumption of constitutionality.

'(T)he power of the states to make classifications of persons or property for the purpose of taxation is very broad. . . . If a classification of persons or occupations made for the purpose of imposing taxes is founded on natural, intrinsic or fundamental distinctions which are reasonable in their relation to the object of the legislation and otherwise, they will be deemed to be...