MCI Commc'ns Servs., Inc. v. Cal. Dep't of Tax & Fee Admin., D072402

• Citation: 239 Cal.Rptr.3d 241,28 Cal.App.5th 635
• Decision Date: 24 September 2018
• Docket Number: D072402
• Court: California Court of Appeals
• Parties: MCI COMMUNICATIONS SERVICES, INC., Plaintiff and Appellant, v. CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION, Defendant and Respondent.

28 Cal.App.5th 635

239 Cal.Rptr.3d 241

MCI COMMUNICATIONS SERVICES, INC., Plaintiff and Appellant,

v.CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION, Defendant and Respondent.

D072402

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

Filed September 24, 2018

Eversheds Sutherland, Carley A. Roberts, Eric J. Coffill, Douglas Mo, Sacramento, Eric S. Tresh, and Suzanne M. Palms for Plaintiff and Appellant.

Xavier Becerra, Attorney General, Diane S. Shaw, Assistant Attorney General, Lisa Chao, Ronald N. Ito, Jane O'Donnell, and Debbie Jean Vorous, Deputy Attorneys General, for Defendant and Respondent.

GUERRERO, J.

In this action for a state tax refund against the California Department of Tax and Fee Administration (CDTFA), Plaintiff MCI Communications Services, Inc. (MCI) appeals from a judgment of dismissal entered after the trial court sustained CDTFA's demurrer to MCI's first amended complaint without leave to amend.

The California Sales and Use Tax Law ( Rev. & Tax. Code, § 6001 et seq. )¹ (SUTL) imposes sales and use taxes on retailers and purchasers for the sale, use, storage, or consumption of tangible personal property within California. Certain categories of property are excluded from the definition of tangible personal property and therefore are not subject to sales and use taxation. Under section 6016.5, one such category of excluded property includes "telephone and telegraph lines, electrical transmission and distribution lines, and the poles, towers, or conduit by which they are supported or in which they are contained." This appeal requires us to decide whether the tax exclusion in section 6016.5 extends to the pre-installation component parts that may one day be incorporated into completed telephone and telegraph systems.

We hold that section 6016.5 excludes only fully installed and completed telephone and telegraph lines from sales and use taxation, not the pre-installation component parts of such lines. Accordingly, we affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

MCI is a provider of telecommunications services and products. Between January 1, 2006 and December 31, 2011, MCI purchased telephone cables, conduit (a round sheath generally made of PVC plastic), and telephone poles from third party vendors and intercompany affiliates. The three categories of items at issue—telephone cables, conduit, and telephone poles—did not require further assembly or construction. Instead, each category of items was assembled and ready for installation at the time of purchase.² After MCI purchased these items, MCI and its subcontractors used MCI's purchased conduit and telephone poles to install the purchased telephone cables for use in MCI's telecommunications network.

MCI paid use tax on the telephone cables, conduit, and telephone poles that it purchased, and then filed a claim for refund under section 6934.³ As the basis for its refund claim, MCI argued that the items at issue did not constitute "tangible personal property" under section 6016 because, according to MCI, those items fell within the sales and use tax exception set forth in section 6016.5.

CDTFA demurred to MCI's first amended complaint and the trial court sustained the demurrer without leave to amend. In relevant part, the trial court ruled that section 6016.5 did not apply to MCI's cables, conduit, and telephone poles because those items were "separate, component parts" of MCI's anticipated telephone line and section 6016.5 "does not apply to pre-installed component parts of a ‘telephone line.’ "

MCI appealed.

DISCUSSION

I. Standard of Review

We review an order sustaining a demurrer under a de novo standard of review. ( McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415, 106 Cal.Rptr.2d 271, 21 P.3d 1189.) " ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.’ [Citation.] Further, we give the [complaint] a reasonable interpretation, reading it as a whole and its parts in their context." ( Finch Aerospace Corp. v. City of San Diego (2017) 8 Cal.App.5th 1248, 1251-1252, 214 Cal.Rptr.3d 628.) Where, as here, a " ‘ "demurrer is sustained, we determine whether the [complaint] states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff." ’ " ( Id . at p. 1252, 214 Cal.Rptr.3d 628.)

II. Sales and Use Tax Principles

The SUTL "embodies a comprehensive tax system created to impose an excise tax, for the support of state and local government, on the sale, use, storage or consumption of tangible personal property within the state." ( Wallace Berrie & Co. v.State Bd. of Equalization (1985) 40 Cal.3d 60, 66, 219 Cal.Rptr. 142, 707 P.2d 204.) A " ‘ "sales tax is a tax on the freedom of purchase," ’ " while a " ‘ "use tax is a tax on the enjoyment of that which was purchased." ’ " ( Ibid . )

"The two taxes, sales and use, are mutually exclusive but complementary, and are designed to exact an equal tax based on a percentage of the purchase price of the property in question." ( Wallace , supra , 40 Cal.3d at p. 66, 219 Cal.Rptr. 142, 707 P.2d 204.) Because they are mutually exclusive, either sales tax or use tax may apply to a single transaction, but not both. Unlike sales tax, which is imposed on the retailer, the person storing, using, or otherwise consuming the tangible personal property at issue is liable for the payment of use tax. (§ 6202.)⁴ A use tax is imposed on purchasers who buy tangible personal property outside of California (for use in California)—where the state otherwise would not receive sales tax revenue. (See Searles Valley Minerals Operations, Inc. v. State Bd. of Equalization (2008) 160 Cal.App.4th 514, 520, 72 Cal.Rptr.3d 857 ( Searles ).) "The use tax is thus intended to complement the sales tax so that, between them, ‘all transactions [that] result in tangible personal property joining the aggregate of capital assets within this state’ will be taxed for the support of the state government." ( Ibid . )

Section 6016 defines tangible personal property—the storage, use, or consumption of which may give rise to use tax liability—as "personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses." There are several exemptions from the tax, such as exemptions for most sales of foods for human consumption (§ 6359), sales of specified prescription medicines (§ 6369), and certain sales to the federal government (§ 6381). At issue here is section 6016.5, which excludes "telephone and telegraph lines, electrical transmission and distribution lines, and the poles, towers, or conduit by which they are supported or in which they are contained" from the definition of tangible personal property.

III. Statutory Interpretation Principles

"[W]e start with the language of the statute, ‘giv[ing] the words their usual and ordinary meaning [citation], while construing them in light of the statute as a whole and the statute's purpose [citation].’ " ( Apple Inc. v. Superior Court (2013) 56 Cal.4th 128, 135, 151 Cal.Rptr.3d 841, 292 P.3d 883.) " ‘The statute's words generally provide the most reliable indicator of legislative intent; if they are clear and unambiguous, "[t]here is no need for judicial construction and a court may not indulge in it." [Citation.] Accordingly, "[i]f there is no ambiguity in the language, we presume the Legislature meant what it said and the plain meaning of the statute governs." ’ " ( Cequel III Communications I, LLC v. Local Agency Formation Com. of Nev. County (2007) 149 Cal.App.4th 310, 318, 57 Cal.Rptr.3d 32.)

"Nonetheless, ‘the "plain meaning" rule does not prohibit a court from determining whether the literal meaning of a statute comports with its purpose or whether such a construction of one provision is consistent with other provisions of the statute. The meaning of a statute may not be determined from a single word or sentence; the words must be construed in context, and provisions relating to the same subject matter must be harmonized to the extent possible. [Citation.]’ ( Lungren v. Deukmejian (1988) 45 Cal.3d 727, 735 [248 Cal.Rptr. 115, 755 P.2d 299].) If a statute is susceptible to more than one reasonable interpretation, the court may consider the statute's purpose, the evils to be remedied, the legislative history, public policy, and contemporaneous administrative construction. ( Nolan v. City of Anaheim (2004) 33 Cal.4th 335, 340 [14 Cal.Rptr.3d 857, 92 P.3d 350].) In addition, the court may consider the consequences that will flow from a particular interpretation. ( Dyna-Med, Inc. v. Fair Employment & Housing Com. (1987) 43 Cal.3d 1379, 1387 [241 Cal.Rptr. 67, 743 P.2d 1323].)" ( Cal. Ins. Guarantee Assn. v. Workers' Comp. Appeals Bd. (2012) 203 Cal.App.4th 1328, 1338, 138 Cal.Rptr.3d 24.)

The interpretation of a statute presents a question of law. ( Searles , supra , 160 Cal.App.4th at p. 520, 72 Cal.Rptr.3d 857.) Accordingly, we interpret section 6016.5 de novo. ( Ibid . )

IV. Analysis

A. Statutory Text

Consistent with the rules of statutory construction, our analysis begins with an examination of the text of section 6016.5 and, more specifically, an inquiry into the meaning of the term "lines" in the statutory provision excluding "telephone and telegraph lines" from taxation. MCI contends that "lines" are synonymous with "cables" and, as a result, argues that a "line" (i.e., cable) exists regardless of whether that line has been installed into an integrated system. CDTFA, on the other hand, argues that a "line"...