McDonnell Douglas Corp. v. State Bd. of Equalization

• Decision Date: 10 November 1992
• Docket Number: No. B061726,B061726
• Citation: 13 Cal.Rptr.2d 399,10 Cal.App.4th 1413
• Court: California Court of Appeals Court of Appeals
• Parties: McDONNELL DOUGLAS CORPORATION, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

Page 399

13 Cal.Rptr.2d 399

10 Cal.App.4th 1413

McDONNELL DOUGLAS CORPORATION, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

No. B061726.

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

Nov. 10, 1992.

Review Denied Feb. 11, 1993.

Latham & Watkins, Albert R. Rodriguez, Robert D. Crockett and Deanna W. Detchemendy, for plaintiff and appellant.

Daniel E. Lungren, Atty. Gen., Timothy G. Laddish, Asst. Atty. Gen., Edmond B. Mamer and Anthony F. Sgherzi, Deputy Attys. Gen., for defendant and respondent.

ORTEGA, Associate Justice.

INTRODUCTION

Plaintiff McDonnell Douglas Corporation (MDC) sold aircraft parts to Aeromexico, the Mexican national airline, to service Aeromexico's airplanes. Aeromexico received the parts at MDC's Long Beach plant and shipped them by United States (U.S.) common carriers to the U.S.-Mexican border at San Ysidro, California, where AM MEX International, a forwarding agent, processed them through U.S. and Mexican customs. After a 48-hour customs delay, the parts were loaded onto Mexican common carriers and shipped to Aeromexico's Mexico City maintenance facility.

Although the U.S. Constitution and the Revenue and Taxation Code ¹ exempt exports from state sales taxes, defendant California State Board of Equalization (the Board) assessed MDC sales tax on the parts. The Board claimed that the parts were not in the "export stream" until they left the border and thus were subject to sales tax. MDC paid the tax under protest and sued the Board for a refund. After a

court trial, the trial court entered judgment for the Board. MDC appeals. We agree with MDC that the parts were in the "export stream" and thus were sales tax-exempt exports. We reverse the judgment.

FACTS

Beginning in 1968, MDC sold Aeromexico aircraft parts to service Aeromexico's airplanes, nearly all of which were MDC manufactured. MDC produced nearly all the parts at its Long Beach factory. Aeromexico's primary service and maintenance facility was in Mexico City. Between January 1, 1978, and December 31, 1980, the period for which the Board assessed the disputed tax, MDC delivered approximately 8,000 such orders, averaging about 10 each working day, worth nearly $7,000,000, to Aeromexico. All orders originated in Mexico, showed Mexico City as the destination, and stated that the parts were for export to Mexico. Aeromexico received and took title to the parts free on board (f.o.b.) in Long Beach. Aeromexico's regular flights between Los Angeles and Mexico City were almost all passenger flights on small, narrow-bodied, twin-engine DC-9 aircraft incapable of carrying more than a small percentage of the parts. Moreover, during the relevant years, Mexican law prohibited U.S. common carriers from operating in Mexico, and U.S. law permitted Mexican common carriers to operate in the U.S. only in the immediate border area.

Other than the few small items flown directly from Los Angeles to Mexico City on Aeromexico aircraft, on which the Board did not assess sales tax, Aeromexico shipped the parts, packaged for export, from Long Beach on U.S. common truck carriers to the U.S.-Mexican border at San Ysidro. Aeromexico retained title and the U.S. common carriers received possession. Separate lading bills were prepared at Long Beach and San Ysidro. Aeromexico had no maintenance or landing facilities at San Ysidro, which lacked rail connections or east-west transportation routes. At San Ysidro, Aeromexico employees assisted AM MEX, an independent freight forwarder, in processing the shipments through U.S. and Mexican customs. Aeromexico used AM MEX's facilities, expertise in U.S. and Mexican customs regulations and fees, and relationships with both countries' customs officials. AM MEX neither took title to the shipments nor was legally obligated to ship the parts to Mexico City. The shipments were not opened, inspected, or repackaged. After the approximately 48 hours required to complete customs processing, the parts were loaded onto Mexican common carriers and trucked to Mexico City. All the parts arrived in Mexico City.

The Board issued Aeromexico a Registration Certificate as a Mexican Exporter, authorizing the San Ysidro transfers, in 1968 and continually renewed it during and after the relevant period. The Board did not assess sales tax on the shipments until January 1, 1978. MDC collected and paid sales tax on a small percentage of the shipments during the relevant period because in those few cases Aeromexico failed to provide MDC adequate documentation of the shipping process.

On July 3, 1985, the Board assessed MDC $348,413 in deficient sales tax and $291,476 in interest on the nearly $7,000,000 of MDC's January 1, 1978, to December 31, 1980, Aeromexico parts sales. MDC paid the tax and interest under protest, petitioned for redetermination, and filed a refund claim. The Board denied the petition and claim. On April 8, 1988, MDC filed this case, seeking a refund. The case was tried to the court based on the facts alleged in the complaint, stipulated facts, and four witnesses' oral testimony.

The court found and entered judgment for the Board, stating: "1. As to the Export/Import clause: The Court finds that the repla[c]ement parts did not enter the stream of exportation until they left San Ysidro by Mexican common carrier. As stated in ... Farmers' Rice [Cooperative v. County of Yolo (1975) 14 Cal.3d 616, 122 Cal.Rptr. 65, 536 P.2d 465] ... and the Administrative Code, 'Export has not begun where property is transported from a point in this state to a warehouse or other collecting point in this state even though it is intended that the property then be transported "2. As to ... [s]ection 6385: The Court finds that [s]ection 6385 ... does not qualify the sale between 78 & 81 as an exempt sale to a common carrier. The parts ... were shipped by UPS or a US common carrier from Long Beach to San Ysidro and not by a facility of the purchasing carrier Aeromexico, as required by Sales and [Use] Tax Regulation 1621. Further the parts were not shipped to an out-of-state destination. In January of 1980, [s]ection 6385 was amended by adding subsection (b). Said subsection is not helpful to [MDC] because Aeromexico did not transport the parts itself. They were transported either by U.S. common carrier or Mexican common carriers.

                and is in fact, transported to another country.'   The Court also finds that the parts had not started on their 'final and continuous journey' until they left San Ysidro.  Thus, the Court concludes the replacement parts were not in the exportation process at the time they left [MDC] in Long Beach and were therefore taxable
                

"3. As to ... [s]ection 6387: [s]ection 6387 is not applicable here because the evidence does not support the fact that Aeromexico is a 'forwarding agent, export packer, or other person engaged in the business of preparing goods for export or arranging for their exportation'. Also Annotation 325.1500 of the Business Taxes Law Guide holds that 'where an export packer is also a purchaser the exemption of [section] 6387 does not apply.'

"In making the above findings the Court considered the following facts: [p] 1. Bills of Lading were issued not just in Long Beach, but also in San Ysidro. [p] 2. The invoices show that the parts were to be shipped within ... California by common U.S. carriers. [p] 3. Once the parts left Long Beach, [MDC] lost control over the parts. [p] 4. The parts were shipped from [MDC] to Aeromexico i[n] San Ysidro, CA. [p] 5. Some of the invoices reflected that sales tax was billed to Aeromexico by [MDC]. [p] 6. There was no evidence presented that the seller and purchaser agreed that a particular form of transportation was to take place between San Ysidro and Mexico City. In fact there was no contract between Am-Mex ... and Aeromexico to deliver the parts to Mexico City. [p] 7. There was no evidence showing that at the time of the purchase, other than delivery to San Ysidro, that a date of exportation was contemplated to and agreed upon by purchaser and seller. [10 Cal.App.4th 1419] [p] 8. Unlike ... Gough [Industries v. State Board of Equal. (1959) 51 Cal.2d 746, 336 P.2d 161] ... there was no exportation number received for the parts. [p] 9. All customs arrangements for importing into Mexico were made after shipment had been made to San Ysidro."

ISSUES

MDC contends the trial court erred because the Aeromexico parts sales were in the "export stream" and thus were sales tax-exempt exports under the import-export clause of the U.S. Constitution and section 6352. MDC also contends sections 6385 and 6387 and California Code of Regulations, title 18, section 1621, which exempt from sales tax sales to common carriers and forwarding agents, and excuse compliance with lading bills procedures, bar the Board from imposing sales tax on the parts sales. ²

DISCUSSION

"This case was presented to the trial court upon stipulations of fact and oral and documentary evidence which supplemented the stipulations. As there was no conflict in the evidence the decisive facts are undisputed and we are confronted with questions of law and not bound by findings of the trial court. [Citations.]" (Mole-Richardson Co. v. Franchise Tax Bd. (1990) 220 Cal.App.3d 889, 894, 269 Cal.Rptr. 662.) "When presented with uncontradicted facts on appeal in tax matters, the appellate court is free to make its own determinations. [Citation.] Our review of the legal question at issue is undertaken independently and we are not bound by the trial "California's Sales and Use Tax Law (... § 6001 et seq.) acts as a 'double filter designed to catch all transactions' involving the purchase or enjoyment of tangible personal property in this state. [Citation.] The sales tax applies only to retail sales in California. ( § 6051.)" (Parfums-Corday, Inc. v. State Bd. of Equalization (1986) 187 Cal.App.3d 630, 634, 232 Cal.Rptr. 56, fn. omitted, italics added.)

                court's

...