Honeywell, Inc. v. State Bd. of Equalization

• Decision Date: 11 February 1982
• Citation: 128 Cal.App.3d 739,180 Cal.Rptr. 479
• Court: California Court of Appeals Court of Appeals
• Parties: HONEYWELL, INC., a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Respondent. Civ. 59982.

Page 479

180 Cal.Rptr. 479

128 Cal.App.3d 739

HONEYWELL, INC., a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Respondent.

Civ. 59982.

Court of Appeal, Second District, Division 5, California.

Feb. 11, 1982.

[128 Cal.App.3d 741] Jack B. Silver, Beverly Hills, for plaintiff and appellant.

George Deukmejian, Atty. Gen., and Neal J. Gobar, Deputy Atty. Gen., for defendant and respondent.

HASTINGS, Associate Justice.

This is an action by Honeywell, Inc. (Honeywell), appellant, for refund of sales and use tax for the years 1964-1968. After a judgment in favor of defendant State Board of Equalization (the Board) denying most of the refunds, Honeywell appeals.

STATEMENT OF FACTS

The record in this case does not permit a statement of facts that graphically describe the various transactions upon which Honeywell's claims for refund are based. Instead the pleadings, the briefs to the trial court and the briefs to this court describe in generalities several different types of transactions which raise specific legal issues without detailing the facts involved. There are four kinds of transactions where Honeywell claims it paid sales or use taxes under protest. In this introductory portion of the opinion we give a brief description of the nature and issue involved in each situation.

The first type of transaction concerns Honeywell's leasing activities. Honeywell leased to numerous large California corporations and businesses test instrument equipment and electro-data processing equipment. A use tax is chargeable based on the rental paid by the lessee. The law imposes a duty on the lessor to collect the tax. The Board through its audit staff had audited Honeywell's lessees and determined that the lessees had not paid the use tax on the leased property. The lessees had no receipts that they had paid the use tax and Honeywell had no receipts or records to prove payment by the lessees. Honeywell paid the taxes under protest. In this action for a refund on the taxes paid Honeywell contends the Board had the burden to prove that the lessees had not paid the tax. The Board argues that Honeywell had this burden of proof. The trial court agreed with the Board.

The second series of transactions involve self-manufactured fixtures that Honeywell as a construction contractor installed under lump sum construction contracts. Such fixtures or similar fixtures are not sold on the open market. The Board determined that Honeywell had underpaid its tax on the sale of these fixtures and based the tax upon Honeywell's "transfer costs" which appeared in its construction estimate work sheets. Honeywell contends that this standard was improper because it does not equate to a "prevailing market price."

The next or third type of transactions involve Honeywell's sales of tangible personal property to customers who in the regular course of their business claim to have resold the property. In such a sale the burden is on the seller (Honeywell) to establish it is not a retail (taxable) sale which can be established by the seller obtaining a resale certificate from the purchaser. On these transactions the Board levied a tax on $23,932 for the taxable period in issue. Honeywell did not take from its purchasers any resale certificates. After the tax was asserted by the Board, Honeywell mailed questionnaires to all of its purchasers and claims the answers to these questionnaires by the purchasers established that the sales were for resale and therefore the presumption under Revenue and Taxation Code section 6091 was overcome. ¹ Honeywell contends the trial court erred when it permitted the presumption of taxability to control because its evidence effectively rebutted the presumption.

The fourth and last issue involves a transaction with the Drever Company of Bethayres, Pennsylvania. Invoices indicate that Honeywell received from Drever some kind of an installation of tangible, personal property costing Honeywell $37,233. A use tax was charged to Honeywell.

Honeywell claims the personal property delivered to it from Drever was not completed and fully assembled and that further labor and material in connection with the property was contemplated; therefore, no tax was due.

DISCUSSION

1. The Lease Transactions. The sole issue here is one of burden of proof. Honeywell contends that the state audits the books and records of its lessees (it was such a series of audits that led to the assertion of use taxes in the present case) and these audits place the Board in a better position to determine whether the lessees had paid the tax than Honeywell. Honeywell states it cannot audit its lessees records and therefore it is at a disadvantage when the burden is on it to prove that the lessee has not paid the tax.

The Board in response to Honeywell's argument first notes that it is quite simple for Honeywell or any lessor for that matter to establish that the lessee has paid the use tax by requiring the lessee to furnish it a copy of the paid tax receipt.

The law as cited to us by the Board supports the trial court's determination that the burden was on Honeywell. First, decisional law in numerous refund cases places this burden on the taxpayer. In a suit for refund of tax, the burden of proof is on the taxpayer. (Flying Tiger Line v. State Bd. of Equal., 157 Cal.App.2d 85, 99, 320 P.2d 552.) The taxpayer must not only prove that the tax assessment is incorrect, but also he must produce evidence to establish the proper amount of the tax. (People v. Schwartz, 31 Cal.2d 59, 64, 187 P.2d 12; Maganini v. Quinn, 99 Cal.App.2d 1, 8, 221 P.2d 241.) In an action for refund, "the taxpayer has the burden of proof to show that he is entitled to his claim. He cannot assert error and thus shift to the state the burden to justify the tax...." (Hall v. Franchise Tax Board, 244 Cal.App.2d 843, 848, 53 Cal.Rptr. 597.)

Second, there are specific provisions of the Sales and Use Tax Law of which place the burden of establishing nontaxability on the taxpayer. Section 6091 provides: "For the purpose of the proper administration of this part and to prevent evasion of the sales tax it shall be presumed that all gross receipts are subject to the tax until the contrary is established."

Section 6241 provides: "For the purpose of the proper administration of this part and to prevent evasion of the use tax and the duty to collect the use tax, it shall be presumed that tangible personal property sold by any person for delivery in this State is sold for storage, use, or other consumption in this State until the contrary is established. The burden of proving the contrary is upon the person who makes the sale unless he takes from the purchaser a certificate to the effect that the property is purchased for resale."

Third, the foregoing authorities specifically imposing the burden of proof upon the taxpayer are supported by common sense. The taxpayer (and not the tax collector) creates the transaction which is the subject of the inquiry. He has the power to determine the nature of the transaction, to create and retain detailed records or other evidence needed to prove its nature (and proper tax treatment). The taxpayer has also the power to destroy or conceal the records or other evidence which would establish the taxable nature of such transaction. Thus, as a matter of policy, the person having the power to create, maintain, and provide the evidence should carry the burden of proof. (Morris v. Williams, 67 Cal.2d 733, 760, 63 Cal.Rptr. 689, 433 P.2d 697.)

The Board concedes that there might be some taxable situations where the burden is not on the taxpayer but is on the Board; however, for the reasons stated above, and under the facts of this particular issue the burden should be on Honeywell. Honeywell, however, argues that such an approach is not realistic. This contention is based on the fact that the lessee is primarily responsible for the tax and the lessor is only a guarantor or secondarily liable. By placing the burden on the lessor Honeywell argues that a lessee in such a situation escapes liability. Honeywell cites cases that recognize that the lessor is secondarily liable but these cases do not directly address the problem of burden of proof under facts similar to our present case. Honeywell's argument is unpersuasive. As lessor it can control the taxable phase of the transaction from the very beginning. It can safeguard itself and prevent the lessee from escaping liability. We conclude that the trial court was correct in ruling that Honeywell had the burden of proving that its lessees had paid the use taxes in question.

2. The Self-Manufactured Fixtures Transactions. The best introduction to this issue is the trial court's finding of fact No. 8 which states as follows:

"8. Measure of Self-Manufactured Fixtures Under Ruling 11: Plaintiff is in some of its activities a construction contractor and manufactures and installs the fixtures involved in this issue under lump sum construction contracts. Such fixtures or similar fixtures are not sold to contractors on the open market. The Board determined sales or use tax in respect of the fixtures involved in this issue on the basis of the 'transfer cost' of such fixtures as set forth in the documents prepared by Honeywell for its use in bidding on the lump sum construction contracts under which the fixtures were eventually installed. Honeywell has not established by preponderance of the evidence that it has paid excessive tax with respect to such fixtures. Use by the Board of the 'transfer cost' used in Honeywell's bidding procedure was a reasonable method of determining the prevailing price at which similar fixtures would be sold to contractors. Bulletin 67-8 is reasonable and is not arbitrary,...