Occidental Life Ins. Co. v. State Bd. of Equalization

• Decision Date: 16 September 1982
• Citation: 135 Cal.App.3d 845,185 Cal.Rptr. 779
• Court: California Court of Appeals Court of Appeals
• Parties: OCCIDENTAL LIFE INSURANCE CO. OF CALIFORNIA, a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents. ALLSTATE INSURANCE COMPANY, OF CALIFORNIA, a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents. COUNTRYWIDE LIFE INSURANCE COMPANY, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents. NATIONAL AMERICAN INSURANCE COMPANY OF CALIFORNIA, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents. NATIONAL AMERICAN LIFE INSURANCE COMPANY OF CALIFORNIA, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents. PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents. PIERCE NATIONAL LIFE INSURANCE COMPANY, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents. TRANSAMERICA LIFE INSURANCE AND ANNUITY COMPANY, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents. Civ. 62555.

Page 779

185 Cal.Rptr. 779

135 Cal.App.3d 845

OCCIDENTAL LIFE INSURANCE CO. OF CALIFORNIA, a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents.

ALLSTATE INSURANCE COMPANY, OF CALIFORNIA, a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents.

COUNTRYWIDE LIFE INSURANCE COMPANY, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents.

NATIONAL AMERICAN INSURANCE COMPANY OF CALIFORNIA, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents.

NATIONAL AMERICAN LIFE INSURANCE COMPANY OF CALIFORNIA, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents.

PACIFIC MUTUAL LIFE INSURANCE COMPANY, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents.

PIERCE NATIONAL LIFE INSURANCE COMPANY, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents.

TRANSAMERICA LIFE INSURANCE AND ANNUITY COMPANY, a California corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, et al., Defendants and Respondents.

Civ. 62555.

Court of Appeal, Second District, Division 2, California.

Sept. 16, 1982.

Hill, Wynne, Troop & Meisinger, Robert J. Wynne, Louis M. Meisinger and James K.T. Hunter, Los Angeles, for plaintiffs and appellants.

George Deukmejian, Atty. Gen., and Philip C. Griffin, Deputy Atty. Gen., for defendants and respondents.

BEACH, Associate Justice.

NATURE OF APPEAL:

Appeal from a judgment of dismissal, after a demurrer was sustained, of an action brought by several insurance companies as a class (appellants) against State Board (respondent) for refund of sales taxes paid to retailers on purchases made by appellants.

THE ISSUE AND OUR HOLDING:

We hold that Article XIII (§ 28(f)) (formerly section 14 4/5 ) of the California Constitution, together with California Revenue and Taxation Code sections 12204, which provide that the gross premium receipts tax imposed on insurance companies shall be in lieu of other taxes, does not forbid the imposition of a sales tax on retail sales of personal property to insurance companies.

DISCUSSION:

Recovery is sought by appellants for taxes paid on retail purchases of personal property for the years 1973 through 1976. During that time California Constitution Article XIII, section 14 4/5 (now section 28(f)) and Revenue and Taxation Code section 12204 restricted taxation of insurance companies by declaring that the gross premium taxation of insurance companies provided by the state constitution (now Art. XIII, §§ 28(a)-(j), inclusive) and implemented by the statute (Rev. & Tax. Code, §§ 12201-12204, inclusive) "... is in lieu of all other taxes and licenses state, county, and municipal, upon such insurers and their property, except [certain specific items not here relevant]." (Art. XIII, § 28(f), Rev. & Tax. Code, § 12204.)

Although it has long been indisputably settled in California that the legal incidence of the sales tax is imposed on the retailer for the privilege of doing retail business (Western Lithograph Co. v. State Bd. of Equalization (1938) 11 Cal.2d 156, 78 P.2d 731) (hereafter Western Lithograph ), appellants nonetheless argue that by reason of the retailer's "passing on" the tax to the ultimate consumer, here appellants, they are thus in fact bearing the burden and are therefore unlawfully being taxed.

It is unnecessary to discuss the merits of appellants' argument or to engage in lengthy examination of the semantics as to who is bearing the burden of the tax and why, and how it is or is not passed on from retailer to consumer. It is sufficient to note that appellants' argument has been considered and repeatedly rejected by numerous cases (see cases listed in Western Lithograph, supra, at pp. 162-163, 78 P.2d 731). It was expressly rejected by the California Supreme Court in Western Lithograph, supra , which holds as a matter of law that the legal incidence of the retail sales tax is on the retailer and not the consumer.

Appellants contend the test for determining the legal incidence of sales taxes set forth in Western Lithograph has been repudiated in favor of the test set forth in Agricultural Bank v. Tax Comm'n (1968) 392 U.S. 339, 88 S.Ct. 2173, 20 L.Ed.2d 1138 (hereafter Agricultural Bank); under the latter test and as expressly ruled by the Supreme Court of the United States, Diamond National Corporation v. State Board of Equalization (1976) 425 U.S. 268, 96 S.Ct. 1530, 47 L.Ed.2d 780 (hereafter Diamond National, 425 U.S. 268, 96 S.Ct. 1530, 47 L.Ed.2d 780) ¹ the incidence of the California sales tax is squarely and exclusively on the consumer. Appellants further bolster their claim by the statement that the "formalistic test for determining the 'legal incidence' of the California Sales Tax applied in Western Lithograph ... was abandoned by the California Supreme Court in the landmark case of Western States Bankcard Assn. v. City and County of San Francisco (1977) 19 Cal.3d 208 [137 Cal.Rptr. 183, 561 P.2d 273] (hereafter Western Bankcard ) in favor of the more realistic substantive test adopted by the United States Supreme Court in Agricultural National Bank of Berkshire County v. State Tax Comm., supra, 392 U.S. 339 [88 S.Ct. 2173, 20 L.Ed.2d 1138] ...."

Appellants are in error; they misconstrue the holding of both Diamond National, 425 U.S. 268, 96 S.Ct. 1530, 47 L.Ed.2d 780 and Western Bankcard. The rule followed in, and the holding of, Diamond National, 425 U.S. 268, 96 S.Ct. 1530, 47 L.Ed.2d 780 are inapplicable at bench. Western Bankcard did not abandon the rule and holding (it says nothing of any "test") of Western Lithograph but rather again affirms the Western Lithograph case and the long-established state rule that the incidence of retail sales tax is on the retail seller.

Turning first to the two United States Supreme Court decisions primarily urged by appellants, Agricultural Bank and Diamond National, 425 U.S. 268, 96 S.Ct. 1530, 47 L.Ed.2d 780, it is clear that neither one governs, nor applies to, the matter at bench. Both are limited to the issue of a federally created immunity as it limits the right of a state to tax federal banks. By contrast, the matter at bench concerns a state constitutional exemption and its effect on a state statute and state insurance companies. There is no federal immunity or federal exemption involved.

The language and brevity of the opinion in Diamond National, 425 U.S. 268, 96 S.Ct. 1530, 47 L.Ed.2d 780, upon which appellants rely, is significant. The entire per curiam opinion reads: "The judgment is reversed. We are not bound by the California court's contrary conclusion and hold that the incidence of the state and local sales taxes falls upon the national bank as purchaser and not upon the vendors. The national bank is therefore exempt from the taxes under former 12 U.S.C. § 548 (1964 ed.), which was in effect at the time here pertinent. First Agricultural Nat. Bank v. Tax Comm'n, 392 U.S. 339, 346-348 [88 S.Ct. 2173, 2177-78, 20 L.Ed.2d 1138] (1968)."

Diamond National, 425 U.S. 268, 96 S.Ct. 1530, 47 L.Ed.2d 780, cites only Agricultural Bank as authority for its decision. In Agricultural Bank, the opinion specifically states: "because the question here is whether the tax affects federal immunity, it is clear that for this limited purpose we are not bound by the state court's characterization of the tax." (Agricultural Bank, supra, 392 U.S. 339, 347, 88 S.Ct. 2173, 2177, 20 L.Ed.2d 1138; emphasis added.) As a result of the United States Supreme Court's express limitation as to federal tax immunity, California courts are not governed by Agricultural Bank or Diamond National, 425 U.S. 268, 96 S.Ct. 1530, 47 L.Ed.2d 780, in the instant matter. Nor are those cases persuasive authority for California courts to follow. The language in Agricultural Bank sounds reasonable. It reads: "It would appear to be indisputable that a sales tax which by its terms must be passed on to the purchaser imposes the legal incidence of the tax upon the purchaser." (Agricultural Bank, supra, 392 U.S. at p. 347, 88 S.Ct. at 2178; emphasis added.) But this observation was part of the court's effort to interpret the intent of the Massachusetts Legislature that the sales tax be absolutely passed on to the purchaser. However, this is no limitation on the California courts' freedom to reach a different result concerning a different law and its purely local effect based on equally meritorious local policies. The interpretation in Agricultural Bank of the Massachusetts statute is not binding on nor necessarily of compelling reasoning to us under the facts at bench.

The "pass-on" ² provisions of the Massachusetts tax involved in Agricultural Bank are different from the "pass-on" provisions of the California tax. In the Massachusetts Agricultural Bank case, "pass on" was mandatory. At bench it is only conditionally required. This difference has been determined to be legally significant. (Diamond Nat. Corp. v. State Bd. of Equalization (1975) 49 Cal.App.3d 778, 783, 123 Cal.Rptr. 160.)

More to the point, as indicated earlier the more important aspect of this case is its interpretation of a state statute in light of the state constitution as they both affect the state citizens in their state activities; there is no federal immunity involved.

Where no federal issue is involved, state courts have final authority to interpret that state's laws. (Brown v. Ohio (1977) 432 U.S. 161, 167, 97 S.Ct. 2221, 2226,...