ITT Gilfillan, Inc. v. City of Los Angeles

• Decision Date: 04 August 1977
• Citation: 72 Cal.App.3d 421,140 Cal.Rptr. 193
• Court: California Court of Appeals Court of Appeals
• Parties: , 24 Cont.Cas.Fed. (CCH) P 81,679 ITT GILFILLAN, INC., Plaintiff and Appellant, v. The CITY OF LOS ANGELES, Defendant and Respondent. LITTON SYSTEMS, INC., Plaintiff and Appellant, v. The CITY OF LOS ANGELES, Defendant and Respondent. Civ. 49209.

Page 193

140 Cal.Rptr. 193

72 Cal.App.3d 421, 24 Cont.Cas.Fed. (CCH) P 81,679

ITT GILFILLAN, INC., Plaintiff and Appellant, v. The CITY OF LOS ANGELES, Defendant and Respondent.

LITTON SYSTEMS, INC., Plaintiff and Appellant, v. The CITY OF LOS ANGELES, Defendant and Respondent.

Civ. 49209.

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

Aug. 4, 1977.

As Modified on Denial of Rehearing Sept. 1, 1977.

Hearing Denied Oct. 13, 1977.

Donnelly, Clark, Chase & Johnson, Edward M. Fox and John A. Donnelly, Los Angeles, for plaintiff and appellant ITT Gilfillan, Inc.

Deane E. McCormick, Jr., Beverly Hills, Barry Pomrantz, Numa L. Smith, Jr., Milton F. Brown, Jr., Miller & Chevalier, and Clarence T. Kipps, Jr., Los Angeles, for plaintiff and appellant Litton Systems, Inc.

Burt Pines, City Atty., Thomas C. Bonaventura, Sr., Asst. City Atty., and Richard A. Dawson, Asst. City Atty., for defendant and respondent City of Los Angeles.

THOMPSON, Associate Justice.

The appeals at bench involve the application of the Los Angeles Business Tax Ordinance to manufacturers performing contracts with the United States. Specifically, we are called upon to determine: (1) whether all of the contractor's gross receipts on contracts calling for the passage of title of component articles to the United States prior to completion of the contracts are taxed at the rate provided for 'manufacturers and sellers' or whether the portion of the receipts allocable to post passage of title manufacture is to be taxed at the higher rate applicable to persons engaged in a trade or occupation 'not otherwise specifically taxed'; and (2) whether the exemption provided in the ordinance for gross receipts from the sale of goods which are shipped by the seller to the purchaser at points outside of California applies to shipments on United States Government bills of lading.

We conclude: (1) the contractor taxpayers are taxable as sellers and manufacturers on their entire receipts from the government contracts; and (2) the exemption for out-of-state shipments does not apply to shipments on government bills of lading. We summarily reject a belated contention by one of the contractors that city taxation measured by gross receipts from government contracts is unconstitutional.

Nature of Taxpayers' Business

The taxpayers are ITT Gilfillan, Inc. and Litton Systems, Inc. The tax years involved are 1963 and 1964 in the case of Gilfillan, and 1960 through 1965 in the case of Litton. ¹ Each of the taxpayers was engaged in business within the City of Los Angeles in those years. Their business activities consisted primarily of the manufacture and delivery of military weapons, equipment, and supplies destined for the United States Government under prime contracts with the Departments of the Army, Navy, and Air Force, or under subcontracts with other government prime contractors.

The contracts were of two types, fixed price and cost reimbursement plus fee. Both types called upon the contractor to furnish and deliver completed items of military weapons, equipment, or supplies.

In the fixed price contracts, the taxpayers agreed to deliver articles and perform services as set forth in a schedule for prices specified in the schedule. Prior to delivery, each item was inspected and accepted by a government representative. Generally, delivery was made monthly in accord with a delivery schedule specified in the contract, FOB carrier's equipment at a station at or near the taxpayer's plant. Shipments were made on government bill of lading where required by the government contracting officer. In shipments on government bills of lading, taxpayers were designated as the 'shipper.' The parties agree that otherwise shipments were on commercial bill of lading. Taxpayers became entitled to payment of the prices stipulated in the contract only after delivery and acceptance of the items called for.

A standard provision of the contracts states: 'When it is provided in this contract that the supplies shall be delivered other than f.o.b. specified destinations, shipment(s) will be made on a Government Bill of Lading. The required number of such Government Bills of Lading will be furnished to the Contractor by the cognizant transportation activity. The Contractor shall acknowledge receipt of these Government Bills of Lading in the manner prescribed. As shipments are made, the Contractor shall prepare and distribute the applicable Government Bills of Lading in accordance with AMC Form 232, 'Instructions for Completing U.S. Government Bills of Lading.' The Contractor also agrees that Government Bills of Lading in excess of the requirements of this contract will be returned to the cognizant transportation activity within a reasonable time after final shipment.'

Some of the fixed price contracts called for progress payments in amounts ranging from 75 percent to 90 percent of costs incurred when authorized by the contracting officer on request. Those payments, when made, were deducted from the contract price payable for the completed items. In contracts made before January 1, 1961, title to all parts, materials, inventories, and work in process acquired or produced by the taxpayer or allocated by it to the contract vested in the government upon production, acquisition, or allocation provided a progress payment was made. In post-January 1, 1961 contracts calling for progress payments, title to the items vested in the government upon acquisition, production, or allocation by the taxpayer. Although title of the items vested in the government, the handling and disposition of the property was the same as if title had not passed. The vesting of title did not relieve the taxpayer of responsibility for the property and it was required to bear the risk of loss, theft, or destruction. Production scrap could be sold by the taxpayer, but in that event the proceeds of sale were credited against the cost of contract performance.

In a cost reimbursement contract, the taxpayer agreed to deliver articles and perform services as scheduled in the contract and to use its best effort to produce the articles and services for prices estimated on the schedule. In the event performance was not possible within the estimated costs, as adjusted periodically, then the taxpayer was relieved from the contract. Taxpayer was entitled to periodic payments, generally monthly, for costs incurred, and to a fixed fee also generally payable in monthly installments. Shipments were made on government bill of lading when required by the government representative and otherwise on commercial bill of lading.

Title to all property acquired by a taxpayer for the performance of cost reimbursement contracts passed to the government immediately upon delivery to taxpayer. The government bore the risk of loss of the property except for loss caused by the taxpayer's willful misconduct or lack of good faith.

City's Taxing Scheme

In all years here pertinent, the City of Los Angeles imposed a tax upon persons and concerns carrying on business within the city. Sections 21.166 and 21.167 of the Los Angeles Business Tax Ordinance impose a tax measured by gross receipts upon every person manufacturing and selling goods at wholesale or retail within the city. The sections also impose a tax at the same rate measured by the gross income of every person selling goods and merchandise within Los Angeles. Section 21.190 of the ordinance imposes a tax upon the gross receipts of 'every person engaged in any trade, calling, occupation, vocation, profession or other means of livelihood, as an independent contractor and not as an employee of another, and not specifically taxed by other provisions of (the ordinance) . . ..' The parties agree that section 21.190 applies to taxpayers to the extent they are not specifically taxed pursuant to section 21.166 or section 21.167.

Section 21.168.1 of the ordinance provides: 'Nothing in Sections 21.166 or 21.167 . . . shall be construed to require the inclusion in the computation of the amount of the tax due thereunder the gross receipts of the sales of goods which are shipped to the purchasers of such goods by the seller to points outside of the State of California.'

The Controversy

Taxpayers reported their gross receipts from contracts of both types as taxable pursuant to section 21.166 or 21.167. They excluded from the measure of tax gross receipts attributable to property shipped to points outside California by both commercial and government bill of lading. ²

For tax years preceding 1954, the city classified taxpayers as manufacturers or sellers of goods, wares, and merchandise so that all of their gross receipts were taxable at the rates stated in sections 21.166 and 21.167 of the ordinance. Beginning with the tax year 1954, the city classified taxpayers' gross receipts as taxable pursuant to sections 21.166 and 21.167 to the extent that the receipts were derived from sales to commercial and industrial customers or to the government pursuant to contracts not containing the vesting of title clause. Different tax treatment was given by the city to gross receipts on contracts which contained the clause vesting in the government title to property used in performance of the contract upon its acquisition or allocation to the contract by taxpayers. As to those contracts, city deemed that a 'sale' had been made by taxpayers to the government when title passed so that all of taxpayers' gross receipts attributable to work performed thereafter were taxable at the higher rate provided by section 21.190 of the ordinance.

City allowed the exclusion for out-of-state shipments only to receipts on contracts which did not include a title vesting clause and which were allocable to property shipped on commercial bill of lading.

Deficiencies in tax for the years here involved were assessed by the city. Taxpayers paid the increased assessment under protest and exhausted their administrative remedies. On ...