International Business Machines v. State Bd. of Equalization

• Citation: 609 P.2d 1,163 Cal.Rptr. 782,26 Cal.3d 923
• Parties: , 609 P.2d 1 INTERNATIONAL BUSINESS MACHINES, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant. L.A. 31114.
• Decision Date: 17 April 1980
• Court: United States State Supreme Court (California)

Page 782

163 Cal.Rptr. 782

26 Cal.3d 923, 609 P.2d 1

INTERNATIONAL BUSINESS MACHINES, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.

L.A. 31114.

Supreme Court of California, In Bank.

April 17, 1980.

Rehearing Denied May 14, 1980.

Evelle J. Younger and George Deukmejian, Attys. Gen., Ernest P. Goodman, Asst. Atty. Gen., Philip M. Plant and Philip C. Griffin, Deputy Attys. Gen., for defendant and appellant.

O'Melveny & Myers, Bennett W. Priest, Donald R. Spuehler, Frederick A. Richman and Dean M. Weiner, Los Angeles, for plaintiff and respondent.

TOBRINER, Justice.

Defendant State Board of Equalization (hereafter Board) appeals from a judgment awarding plaintiff International Business Machines (hereafter IBM) a sales tax refund of $735,196.27 for taxes paid by IBM during 1965-1967. ¹ The Board contends that the trial court erred in concluding that certain lease receipts were exempt from taxation under a "grandfather clause" contained in Assembly Bill No. 1 of the 1965 First Extraordinary Session, hereafter referred to as the 1965 Lease Tax Law.

As we shall explain, we concur in the Board's position, concluding that in light of the statutory language, the legislative history, and the applicable principles of statutory construction, the Board's administrative construction of the 1965 Tax Lease Law was both reasonable and persuasive. Thus, we hold, the lease antedating the 1965 law could attain tax exemption only if the parties had been unconditionally bound to continue the lease at a rental that had been fixed prior to the effective date of the law. Because under this construction IBM's leases fail to win exemption, the judgment should be reversed.

1. Statement of facts and proceedings below.

Before 1965, receipts from a lease of personal property were not necessarily subject either to sales or use tax. The statutes gave a lessor the option of either paying a sales or use tax based upon his cost of acquisition or measuring his tax liability by rental receipts. This same option embraced lessors, such as IBM, who manufactured the equipment that they leased. Such a lessor normally elected to pay sales or use tax on the cost of parts and materials purchased for use in manufacturing the leased property. Since that cost did not include allowances for labor, overhead, and profit, which would nevertheless be reflected in the subsequent rental price, manufacturer-lessors such as IBM enjoyed a tax advantage under the pre-1965 scheme. Such manufacturer-lessors avoided all sales and use taxes except a sales tax on the raw materials used in the manufacturing process.

In 1965, the California Legislature took notice of this inequity in the taxing system and amended the Sales and Use Tax Law to provide for the direct taxation of leases. The new law generally imposed a use tax on the lessee, the tax being measured by the lessee's rental payments that were collected by the lessor. But because some business institutions in California, most notably banks and insurance companies enjoyed exemption from paying any use tax, the new law provided that in such cases the lessor would be liable for a sales tax based on payments received from the lessee. ²

The present case concerns the application of two provisions of the 1965 Lease Tax Law, section 6006.3, subdivision (b), and section 6391, to receipts derived from IBM's leases of personal property. Section 6006.3, subdivision (b), defined a taxable lease, for purpose of sales and use tax, to include "only an original lease or a renewal of an original lease entered into or executed after the operative date of this section (August 1, 1965)." Section 6391 granted a sales tax exemption for "the rentals payable under a lease of tangible personal property for any period of time for which the lessor is unconditionally obligated to lease the property for an amount fixed by the lease prior to the operative date of this section . . . ." Thus both provisions constituted "grandfather clauses" exempting certain antecedent leases from sales tax.

Section 6006.3, subdivision (b), was shortlived; the 1967 Legislature repealed that section and replaced it with section 6407. Section 6407 adopted the unconditional obligation language of section 6391, which had provided a sales tax exemption for leases which obligated the lessor to a lease for a rental fixed prior to August 1, 1965, to define a parallel exemption from use tax. ³ The parties agree that since section 6407 became effective on November 8, 1967, IBM leases are exempt from tax only if they were executed before August 1, 1965, and impose an unconditional rental obligation.

IBM now seeks a refund for sales tax paid between November 1, 1965, and March 31, 1967, on receipts derived from lease agreements between IBM and various banks and insurance companies constitutionally exempt from use tax liability. The leases in question were executed prior to August 1, 1965, but subject to cancellation or modification by either party. The standard lease form employed provided that the parties' original agreement would remain in effect for one year following the date of the installation of the first equipment. Thereafter, the agreement could be modified or terminated upon three months written notice. The lessee could request machines in addition to, or to replace, the original machines; IBM could change the monthly rental charge for any or all of its equipment. Models were updated as necessary and the later models, having different capabilities, commanded higher lease rentals than older models.

The record does not detail the history of the individual leases. From the tenor of the controversy below and in this court, we can assume that most of the IBM leases in question were executed more than one year prior to August 1, 1965, and thus as of that date were subject to modification or termination on three months' notice. We further assume that notwithstanding the power of termination, the leases remained in effect during the period from November 1, 1965, through March 31, 1967, but that many of the leases were modified during that period; the modifications involved increases in rentals, delivery of new equipment, replacement or modification of old equipment, and other matters.

IBM also sought refunds for sales taxes paid on three categories of equipment orders. "Category 1" orders were those in which the lease was executed before August 1, 1965, but the equipment installed after that date. "Category 2" referred to orders subsequent to August 1, 1965, by existing customers pursuant to provisions of leases executed before the statutory date. "Category 3" referred to conditional orders placed before August 1, 1965, but in which the lease was actually executed and the equipment delivered after that date.

IBM filed suit for refund in the superior court pursuant to section 6933. It claimed that the "renewal" subsequent to August 1, 1965, of an antecedent lease did not render the lease receipts taxable. Alternatively, it contended that even if the "renewal" of an antecedent lease renders such receipts taxable, neither the parties' failure to exercise the power to terminate under the IBM standard lease, nor such modifications as resulted from changes in equipment or rental rates, constituted a taxable "renewal" of the lease. Finally, it claimed the orders in categories 1-3 were exempt from tax. The matter was submitted to the trial court on stipulated facts, ⁴ which found in favor of IBM on all principal issues ⁵ and entered judgment ordering a refund of $735,106.27. The Board appeals from that judgment.

2. Receipts from leases renewed after August 1, 1965, are not exempt from sales tax.

Both section 6391 and section 6006.3, subdivision (b), defined an exemption from the sales tax. The Board maintains that under section 6391 the renewal after August 1, 1965, of a prior lease clearly renders the receipts taxable. Section 6391 exempted only leases "for which the lessor is unconditionally obligated to lease the property for an amount fixed by the lease prior to August 1, 1965"; presumably upon the renewal of a lease the parties could renegotiate the rent, and could no longer be said to be unconditionally obligated to lease for an amount fixed at an earlier date. IBM does not dispute this interpretation of section 6391.

IBM maintains, however, that section 6006.3, subdivision (b), enacted a broader exemption than section 6391, and that this broader exemption controls the instant case. The board, in response, contends that the two statutes should be construed together, with the exemption of section 6006.3, subdivision (b), read narrowly to avoid inconsistency with the provisions of section 6391. We turn therefore to the construction of section 6006.3, subdivision (b), to determine whether that section stands in irreconcilable conflict with section 6391.

Section 6006.3, subdivision (b), defined a taxable lease as "an original lease or a renewal of an original lease entered into or executed after (August 1, 1965)." The board construes this language to permit taxation of (a) a lease executed after August 1, 1965, and (b) the renewal after that date of a lease executed before August 1, 1965. IBM argues that the statute permits taxation only of (a) a lease executed after August 1, 1965, and (b) the renewal of such a lease, i. e., a lease executed after August 1, 1965.

The Board has embodied its interpretation of section 6006.3, in an administrative regulation. ⁶ That regulation, a contemporary administrative construction of a statute by the agency charged with its enforcement and interpretation, "is entitled to great weight unless it is clearly erroneous or unauthorized." (Rivera v. City of Fresno (1971) 6 Cal.3d 132, 140, 98 Cal.Rptr. 281, 285, 490 P.2d 793, 797; Wilkinson v. Workers' Comp. Appeals Bd. (1977) 19 Cal.3d 491, 501, 138 Cal.Rptr. 696, 564 P.2d 848.) ⁷

The language of section 6006.3, subdivision (b)...