Kaiser Steel Corp. v. State Board of Equalization

• Decision Date: 08 May 1979
• Citation: 154 Cal.Rptr. 919,24 Cal.3d 188,593 P.2d 864
• Parties: , 593 P.2d 864 KAISER STEEL CORPORATION, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. L.A. 31058.
• Court: California Supreme Court

Page 919

154 Cal.Rptr. 919

24 Cal.3d 188, 593 P.2d 864

KAISER STEEL CORPORATION, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

L.A. 31058.

Supreme Court of California.

May 8, 1979.

Loeb & Loeb, John S. Warren and Andrew S. Garb, Los Angeles, for plaintiff and appellant.

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

MANUEL, Justice.

Plaintiff Kaiser Steel Corporation (Kaiser) appeals from a judgment denying recovery of certain sales and use taxes paid to defendant State Board of Equalization (Board) in the period October 31, 1967, through December 31, 1973. We conclude that Kaiser purchased the materials which are the subject of the disputed taxes for a "purpose other than resale" and that the transactions were "retail sales" within the provisions of Revenue and Taxation Code, section 6007. ¹ We therefore affirm the judgment.

The case was tried by the court upon stipulated facts as follows: At its plant in Fontana, Kaiser is engaged in the manufacture and production for sale of steel, pig iron, and other products. Kaiser purchased certain materials to charge its furnaces and to remove impurities from the molten metal, namely, limestone, burnt lime, fluorspar, raw dolomite, burnt dolomite, bentonite, aluminum bar and shot, gravel, and aluminum magnesium alloy (materials). The removal of impurities is accomplished by combining them with the materials to form slag.

Portions of the materials were incorporated in the steel to achieve a specific quality; portions simply remained in the finished steel; portions were dissipated or lost in the manufacturing process; and portions, ranging from 52 percent to 97 percent of various materials, became components of the slag. None of the aluminum magnesium alloy became part of the slag; 80 percent remained in the steel product and 20 percent was dissipated. Forty percent of the aluminum bar and shot was incorporated into the steel, giving it a fine grained quality; the remaining 60 percent ended up in the slag. Only those portions of those materials which became components of the slag are at issue in this litigation.

An independent company removed the slag from Kaiser's premises, paid Kaiser 1 cent for each ton removed, reprocessed the slag, and remitted to Kaiser a 10 percent royalty on the net sales price of the reprocessed slag, which is used in a wide variety of businesses and for a number of differing purposes. Through this arrangement Kaiser recovered 8.7 percent of the cost of the raw materials (including the value of removing the slag). ²

When it purchased the materials Kaiser either paid the sales tax (§ 6052) or gave the vendors a resale certificate (§ 6091) and later paid a use tax (§ 6094, subd. (a)). Kaiser filed claims for refund with the Board for sales and use taxes paid with respect to the materials that combined to form slag, alleging that the materials had been purchased for the purpose of resale. The company brought the instant action pursuant to section 6934 when the Board failed to take action on the claims.

The Board took the position that Kaiser purchased the materials for a purpose other than resale, namely to aid in the manufacture of steel, and that therefore the purchases were not tax exempt. Kaiser contended that it purchased the materials for the purpose of resale in the form of slag, a by-product in the manufacture of steel. Kaiser asked the court to order an apportionment of the cost of the materials between the exempt and nonexempt uses of the materials.

The trial court construed the pertinent authorities and concluded that Kaiser's "primary purpose" for purchasing the raw materials determines their taxability. It found the Board's conclusion that Kaiser purchased the materials primarily to aid in manufacturing steel was reasonable. The court therefore held that the purchases of raw materials were subject to sales and use tax. We agree.

Section 6051 provides for a tax on all retail sales. Section 6007 defines a retail sale as "a sale for any purpose other than resale in the regular course of business in the form of tangible personal property." Normally, the tax is collected by the retailer from the purchaser. (§ 6052.) If the purchaser pays the tax, then resells the property "prior to making any use of the property other than retention, demonstration, or display while holding it for sale in the regular course of business," a deduction is allowed. (§ 6012, subd. (a) (1).) On the other hand, if the purchaser gives a resale certificate to the seller (§ 6091) and thereafter makes use of the property before reselling it, a "use" tax is imposed on the original purchase price. (§ 6094, subd. (a).)

A Board regulation generally applicable to manufacturers, producers, and processors provides: "(a) Tax applies to the sale of tangible personal property to persons who purchase it for the purpose of use in manufacturing, producing or processing tangible personal property and not for the purpose of physically incorporating it into the manufactured article to be sold. Examples of such property are machinery, . . . and chemicals used as catalysts or otherwise to produce a chemical or physical reaction such as the production of heat or the removal of impurities.

"(b) Tax does not apply to sales of tangible personal property to persons who purchase it for the purpose of incorporating it into the manufactured article to be sold, as, for example, any raw material becoming an ingredient or component part of the manufactured article." (Reg. 1525.)

In determining whether a sale is taxable as a retail sale or exempt as a sale for resale, the California courts have consistently looked to the primary intent of the purchaser or primary purpose of the purchase. (People v. Puritan Ice Co. (1944) 24 Cal.2d 645, 151 P.2d 1; Good Humor Co. v. State Board of Equal. (1957) 152 Cal.App.2d 873, 313 P.2d 640; Am. Distilling Co. v. St. Bd. of Equalization (1942) 55 Cal.App.2d 799, 131 P.2d 609; Kirk v. Johnson (1940) 37 Cal.App.2d 224, 99 P.2d 279; People v. Monterey Ice & Dev. Co. (1938) 29 Cal.App.2d 421, 84 P.2d 1069; see also, Safeway Stores v. State Bd. of Equal. (1957) 148 Cal.App.2d 299, 306 P.2d 597; Luer Pack Co. v. State Bd. of Equalization (1950) 101 Cal.App.2d 99, 224 P.2d 744.) In Puritan, ice was sold to vegetable packers and shippers for use in preserving perishable products. This court held that the sales to packers and shippers were retail sales and taxable despite the fact that the packers and shippers separately charged their customers for the ice. "The essence of the matter is that the purchasers of the ice are acquiring it for purpose other than resale. They are not engaged in the ice selling business. They are selling vegetables and the use of the ice or purported sale thereof to the purchasers of the vegetables is merely an incident of that activity. It is common knowledge that the dominant purpose for the use of ice in shipping perishable produce is to preserve the produce by means of refrigeration . . ." (24 Cal.2d at pp. 651-652, 151 P.2d at p. 4; accord Good Humor Co., supra, 152 Cal.App.2d at p. 877, 313 P.2d 640 (dry ice merely passed on "as an incident" of ice cream product sales activity); Monterey Ice & Dev. Co., supra, 29 Cal.App.2d at p. 424, 84 P.2d 1069 ("real purpose" of ice purchase was to furnish refrigeration as a "necessary incident" of business of selling lettuce).)

In Kirk v. Johnson, supra, 37 Cal.App.2d 224, 99 P.2d 279, the "primary purpose" test was applied where cows, purchased for milk production, were eventually sold for beef. The original purchase was taxable in full because the primary purpose was dairy use, not resale for beef. In Safeway Stores, supra, 148 Cal.App.2d 299, 306 P.2d 597, the company purchased cartons which were used to ship products from the warehouse to retail stores; 80 percent remained in good condition and were eventually used for crating retail customers' grocery purchases, an exempt use. The court held that the total carton purchase was subject to sales tax because Safeway first used all of them for a nonexempt purpose.

We recognize that none of the cases discussed thus far involve the purchase of materials for manufacturing. We cannot agree with Kaiser, however, that the primary purpose test has no application in the manufacturing industries. In our view, regulation 1525, quoted earlier, Is a statement of the primary-purpose test. Thus, if property is purchased as an aid in the manufacturing process, it is taxable despite the fact that some portion remains in the finished product or that an incidental waste or by-product results. Conversely, if the property is purchased for incorporation as a component of the finished product, it is not taxable despite the fact that some portion may be lost or otherwise dissipated in the manufacturing process.

Our interpretation of the regulation accords with the interpretation of the Board in its tax counsel rulings. Our interpretation is also in accord with the history of the regulation and its predecessor, rule 3. That rule simply provided for exemption from sales tax of property which entered into and became an ingredient or component part of the manufactured product. In Am. Distilling Co. v. St. Bd. of Equalization, supra, 55 Cal.App.2d 799, 131 P.2d 609, a purchaser of chemicals used in manufacturing commercial alcohol sought refund of sales taxes paid. The chemicals were essential to and used in the fermentation and distillation process; none of the chemicals (trisodium phosphate, ammonium sulphate, and sulphuric acid), as such, became component parts of the alcohol, but some component elements of the chemicals remained in the alcohol and about 5 percent of the chemicals remained as by-products (carbon dioxide and fusel oil) which were separately sold. All of the chemical purchases were held subject to tax. In rejecting the distiller's claim...