Market St. Ry. Co. v. California State Bd. of Equalization

• Decision Date: 18 November 1955
• Court: California Court of Appeals Court of Appeals
• Parties: MARKET STREET RAILWAY COMPANY, a corporation, Plaintiff and Appellant, v. CALIFORNIA STATE BOARD OF EQUALIZATION, a state agency, Defendant and Respondent. Civ. 16359.

Page 20

290 P.2d 20

137 Cal.App.2d 87

MARKET STREET RAILWAY COMPANY, a corporation, Plaintiff and Appellant, v. CALIFORNIA STATE BOARD OF EQUALIZATION, a state agency, Defendant and Respondent.

Civ. 16359.

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

Nov. 18, 1955.

Keith, Creede & Sedgwick, Frank J. Creede, John S. Howell, San Francisco, for appellant.

Edmund G. Brown, Atty. Gen. of the State of California, James E. Sabine, Asst. Atty. Gen., Ernest P. Goodman, Deputy Atty. Gen., Sho Sato, Deputy Atty. Gen., for respondent.

PETERS, Presiding Justice.

Market Street Railway Company hereafter referred to as Market, paid under protest, sales taxes, together with interest and penalty, assessed against it for the period August 1, 1933, to December 31, 1948, in the amount of $111,359.36, and then brought this action to recover this payment. ¹ During the trial it was stipulated that the taxes in part had been erroneously assessed against the sale of real property, and that, in any event, Market should recover $21,325.39, with interest. Judgment in that sum was entered in favor of Market. From that judgment Market appeals, contending that no portion of the amount paid by it under protest should have been assessed.

The State Board of Equalization found that between 1933 and 1948 Market, in some 900 transactions, had sold tangible personal property subject to the tax valued at $2,987,434.38. Of this amount, $2,891,578.83 represented the value of trangible personal property transferred by Market to San Francisco on September 29, 1944, when it sold its operative properties to the City. This is the major item involved on this appeal.

The facts are as follows: Market is a California corporation first organized in 1893. From then, in various corporate forms, until 5 p. m. on September 29, 1944, it was a public service corporation operating in San Francisco and San Mateo counties.

As early as 1912 it was the expressed desire of San Francisco to own and operate all of the street railways in the city. The Charter of 1932, in § 119, expresses this purpose in the following language: 'It is the declared purpose and intention of the people of the city and county, when public interest and necessity demand, that public utilities shall be gradually acquired and ultimately owned by the city and county.'

The efforts of the City to acquie Market became very direct in 1940. For four years thereafter the City tried to negotiate the purchase. In November of 1942, and again in April of 1943, charter amendments authorizing the purchase for $7,950,000 were submitted to the voters and defeated. Finally on May 16, 1944, the voters approved the addition of Section 119.1 to the Charter providing for the purchase of Market's operative properties for $7,500,000. Market and the City, on September 14, 1944, entered into a contract, approved by the Railroad Commission, to convey these properties to the City, and a deed was executed making the transfer effective as of 5 p. m. Setpember 29, 1944. At that moment Market ceased its operations and commenced winding up its affairs, liquidating the claims against it and disposing of its non-operative properties, both real and personal.

The trial court found that the sale was 'the result of voluntary and willing negotiations' between the parties. This finding is supported. Although the evidence shows that Market was apprehensive after 1932, when Section 119 of the Charter was enacted, about the possibility of eminent domain proceedings being instituted against it, and that such apprehension became more acute when Section 119.1 was enacted in 1944, the evidence also shows that beginning in 1942 the company was willing and desirous to negotiate a sale because of steadily declining revenues, increasing expenses, competition, poor financing and possible bankruptcy.

The trial court also found that for many years prior to October 1, 1944, there was in existence an interpretative ruling of the State Board of Equalization, number 63, which provided:

'The tax does not apply to any portion of the consideration paid in connection with the sale of an entire business; that is, equipment, fixtures, and so forth. * * *' But on October 1, 1944, two days after the effective date of the sale, the State Board revised Ruling 63 to read as follows: 'The tax applies to that portion of the gross receipts from the sale of an entire business operated by a retailer that represents the fair retail value of the tangible personal property, such as show cases and office or delivery equipment, acquired for use rather than resale by the purchaser of the business. The tax does not apply, however, with respect to tangible personal property such as stock in trade, sold for the purpose of resale in the regular course of the purchaser's business.'

The evidence shows that just prior to the sale the legal department of Market had made an analysis of the taxes involved in the transaction and had come to the conclusion that no sales tax was applicable. The trial court found that Market relied upon Ruling 63 as it read prior to October 1, 1944 'but said ruling did not cause plaintiff to change its position or course of conduct with regard to said sale,' and further that 'reliance by plaintiff on interpretative Ruling 63 * * * did not result in any prejudice to plaintiff.'

On December 29, 1944, Market became aware for the first time of the amendment to Ruling 63, and the chief counsel and vice president of the company advised it that since the ruling did not become effective until October 1, 1944, it was not applicable to the sale.

In 1948, some four years after the sale to the City, the State Board, in auditing the books of another company, discovered sales to that company by Market of some of its non-operative property. An audit of Market's books was then made. This audit disclosed that Market had never paid any sales taxes nor had it ever filed a return, although between 1933 and December of 1948 it made about 900 sales of tangible personal property not for resale by the buyer, totalling, not including the sale to the City, about $100,000. Prior to the sale to the City these sales consisted mainly of sales of scrap material such as used or surplus ties and rails, sales made for the accommodation of employees, and several sales of rock from a rock quarry operated by Market. Prior to the sale to the City these sales amounted to 11/100 of 1% of the gross operating revenue of Market. After the sale of the operative properties to the City the sales were of nonoperative personalty. In the sale to the City the State Board determined that the tangible personal property involved was valued at $2,891,578.83. Market contested some of the items on the ground that some of the articles were fixtures, and during trial the parties stipulated that Market should recover $21,325.39 of the $111,359.36 tax assessed against and paid by it. This amount was computed as follows:

Tax ....... $ 75,065.54

Interest .... 28,787.27

Penalty ...... 7,506.55

-----------

Total ..... $111,359.36 The trial court determined that Market was a retailer, that all of the sales of tangible personal property not for resale were taxable, and entered judgment for Market in the stipulated amount of the overcharge--$21,325.39. Market appeals.

The first basic question involved is whether the sale of all of the operating properties of Market, insofar as it involved a transfer of tangible personal property not for resale by the buyer, in September of 1944, was taxable under the Sales and Use Tax Law of this state. The parties discuss the problem from several standpoints, and quote from and rely upon authorities from many states, but the problem is basically one of interpreting the applicable California statutes.

The Sales and Use Tax Act is found in the Revenue and Taxation Code, §§ 6001 to 7176. As of September 29, 1944, the applicable sections read as follows:

Section 6051: 'For the privilege of selling tangible personal property at retail a tax is hereby imposed upon all retailers at the rate of 2 1/2 percent of the gross receipts of any retailer from the sale of all tangible personal property sold at retail in this State * * *.'

Section 6007: 'A 'retail sale' or 'sale at retail' means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property.'

Section 6013: "Business' includes any activity engaged in by any person or caused to be engaged in by him with the object of gain, benefit, or advantage, either direct or indirect.'

Section 6015: "Retailer' includes: (a) Every person engaged in the business of making sales at retail * * * of tangible personal property * * *.'

Section 6052: 'The tax hereby imposed shall be collected by the retailer from the consumer in so far as it can be done.'

In the interpretation of those tax statutes Market correctly points out that all reasonable doubts must be resolved in favor of the taxpayer. County of Los Angeles v. Jones, 13 Cal.2d 554, 90 P.2d 802; Barker Bros., Inc., v. City of Los Angeles, 10 Cal.2d 603, 76 P.2d 97. But there is no real doubt as to what the quoted statutes provide. Even interpreted most strictly against the state, they clearly make the transactions here involved 'retail sales,' and make Market a 'retailer.' Section 6007 defines a sale at retail as a 'sale for any purpose other than resale in the regular course of business'. Clearly, Market engaged in sales at retail to a buyer who purchased not for resale in the regular course of his business. The only way an ambiguity can be created in the quoted phrase is by interpreting the phrase 'in the regular course of business' as referring to 'sale,' i. e., the seller, and not to 'resale,' i. e., the buyer. But the section neither grammatically nor reasonably so provides. Obviously, the words 'in the regular course of business' refer to and limit the word 'resale' rather than the word 'sal...