Ontario Community Foundations, Inc. v. State Bd. of Equalization

• Decision Date: 19 April 1984
• Court: California Supreme Court
• Parties: , 678 P.2d 378 ONTARIO COMMUNITY FOUNDATION, INC., et al., Plaintiffs and Respondents, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant. L.A. 31710.

Page 165

201 Cal.Rptr. 165

35 Cal.3d 811, 678 P.2d 378

ONTARIO COMMUNITY FOUNDATION, INC., et al., Plaintiffs and Respondents, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.

L.A. 31710.

Supreme Court of California.

April 19, 1984.

Rehearing Denied June 19, 1984.

Horace N. Freedman, Ervin, Cohen & Jessup, Los Angeles, for plaintiffs and respondents.

Edmond B. Mamer, Richard E. Nielsen, Deputy Attys. Gen., Los Angeles, for defendant and appellant.

RICHARDSON, Justice. ^*

Defendant, State Board of Equalization (Board), appeals from a judgment in a consolidated action in favor of plaintiffs, Ontario Community Foundation, Inc. (Ontario) and National Medical Convalescent Hospital of San Diego, Inc. (NMCH). The judgment awards a refund of sales tax assessed on the transfer of hospital furnishings and equipment made as part of the sale of the total assets of hospitals operated by plaintiffs. We agree that such transfers were "occasional sales" which were exempt from sales tax and affirm the judgment.

The facts are stipulated. Ontario and NMCH respectively operated 99-bed and 39-bed general hospitals in Ontario and Turlock, California. Each plaintiff had a seller's permit issued by the defendant and required by law (Rev. & Tax.Code, § 6066; all further statutory references are to this code) because it (a) operated a food service facility which sold meals to patients and nonpatients, such as hospital visitors and employees, (b) sold miscellaneous personal items from its supply unit, and (c) operated a pharmacy. The food service facility, supply department and pharmacy were all operated at the same location as the hospitals.

During the three years prior to the sale of the hospitals, annual retail sales attributable to the three above mentioned services averaged about 10 percent of the hospitals' annual gross receipts. Of these retail sales, however, the vast majority were pharmacy sales exempt from taxation. (See Cal.Admin.Code, tit. 18, reg. 1591, subd. (a)(1).). Taxable sales amounted to little over 1 percent of each hospital's gross receipts.

The entire assets of Ontario, including the real property on which the hospital was located and the furnishings, machinery and equipment of the hospital, were sold in 1977 for over $1.7 million, of which $292,051 was for tangible personal property. Of the latter amount, $19,120 was allocable to kitchen and dietary equipment.

The sale of the tangible personal property was not reported as a taxable transaction. The Board, however, determined a sales and use tax deficiency of $17,827 on the transaction. Ontario conceded the $1,147 tax levied upon the kitchen and dietary equipment, but challenged the remaining $16,680 by seeking a refund after paying the tax. (See § 6933.) It later conceded another $229.

NMCH sold the entire assets of its hospital in 1977 for over $1.5 million, of which $264,230 was for tangible personal property. Approximately $4,405 of that amount was for kitchen and dietary equipment. Like Ontario, NMCH did not report the sale as a taxable transaction, and the Board determined a $15,854 tax deficiency. NMCH conceded a $264 tax liability, attributable to the kitchen and dietary equipment, but has challenged assessment of the balance of the tax.

In each instance the plaintiffs paid the taxes under protest and plaintiffs' actions to recover them were consolidated and heard by the court without a jury. The court found that the sales in question were exempt from tax as "occasional sales" (see §§ 6006.5, 6367), and entered judgment for plaintiffs for the disputed sums plus interest.

The California sales tax is imposed upon "retailers" for the privilege of making "retail sales," and the tax is measured by the gross receipts from "retail sales." (§ 6051.) In 1947 the Legislature expressly exempted from such tax an "occasional sale" (§ 6367), which it defined as including: "A sale of property not held or used by a seller in the course of activities for which he is required to hold a seller's permit or permits ..., provided such sale is not one of a series of sales sufficient in number, scope and character to constitute an activity for which he is required to hold a seller's permit ...." (§ 6006.5, subd. (a).)

The hospital equipment and furnishings sold by plaintiff hospitals were used in rendering medical and nursing services. At no time was such personalty directly or indirectly used by the hospitals in the course of activities for which they were required to hold a seller's permit. Nor was the single sale by each hospital of its equipment and furnishings, in connection with the sale of its entire business and the real property upon which it was located, "one of a series" of such sales which independently might require a permit under the statute. Accordingly, each hospital sale at issue here clearly would appear to fall within the statutory definition of a tax-exempt "occasional sale."

In arguing that the sales tax exemption is inapplicable, however, the Board relies upon its regulation withholding the exemption for an otherwise concededly tax-exempt "occasional sale" if the seller is a "unitary business" also engaged in other sales which are not tax-exempt. (See Cal.Admin.Code, tit. 18, reg. 1595, subd. (a)(3).) The Board seeks to apply the "unitary business" concept to the hospitals here to tax their otherwise tax-exempt sales because such hospitals also were involved minimally in other activities requiring a seller's permit, namely, cafeteria sales to nonpatients and a small, nonexempt portion of their pharmacy and hospital supply sales, representing in the aggregate a minute fraction of the gross income of each hospital. By reason of its regulation, the Board contends that the one-time sale by each institution of all of its hospital equipment and furnishings does not qualify for the statutory tax exemption applicable thereto. It would thus read the regulation as being contrary to the apparent import of section 6006.5, thereby depriving each plaintiff of a sales tax exemption for an "occasional sale," to wit: a sale of personalty not held in the course of activities for which a seller's permit was required, and not one of a series of similar sales which independently might require such a permit.

The standard of our review of the Board's "unitary business" regulation is clear. The Legislature has delegated to the Board the duty of enforcing the sales tax law and the authority to prescribe and adopt rules and regulations. (Action Trailer Sales, Inc. v. State Bd. of Equalization (1975) 54 Cal.App.3d 125, 132, 126 Cal.Rptr. 339; §§ 7051, 7052.) This delegation is proper even though it confers some degree of discretion on the Board. So long as this discretion is exercised within the scope of the controlling statute, the administrative judgment will not be disturbed by the courts. (Action Trailer Sales, supra, 54 Cal.App.3d at p. 132, 126 Cal.Rptr. 339.) In determining the proper interpretation of a statute and the validity of an administrative regulation, the administrative agency's construction is entitled to great weight, and if there appears to be a reasonable basis for it, a court will not substitute its judgment for that of the administrative body. (Id., at p. 133, 126 Cal.Rptr. 339; see Culligan Water Conditioning v. State Bd. of Equalization (1976) 17 Cal.3d 86, 93, 130 Cal.Rptr. 321, 550 P.2d 593.)

On the other hand, we have said that "Where a statute empowers an administrative agency to adopt regulations, such regulations 'must be consistent, not in conflict with the statute, and reasonably necessary to effectuate its purpose.' (Mooney v. Pickett (1971) 4 Cal.3d 669, 679 [94 Cal.Rptr. 279, 483 P.2d 1231] ...; Gov.Code, § 11342.2.) The task of the reviewing court in such a case ' "is to decide whether the [agency] reasonably interpreted the legislative mandate." [Citation.]' (Credit Ins. Gen. Agents Assn. v. Payne (1976) 16 Cal.3d 651, 657 [128 Cal.Rptr. 881, 547 P.2d 993] ....) Such a limited scope of review constitutes no judicial interference with the administrative discretion in that aspect of the rulemaking function which requires a high degree of technical skill and expertise. [Citation.] Correspondingly, there is no agency discretion to promulgate a regulation which is inconsistent with the governing statute. [p] We repeat our admonition expressed in Morris v. Williams (1967) 67 Cal.2d 733, 737 [63 Cal.Rptr. 689, 433 P.2d 697] ...: 'Our function is to inquire into the legality of the regulations, not their wisdom .... Administrative regulations that violate acts of the Legislature are void and no protestations that they are merely an exercise of administrative discretion can sanctify them.' Acknowledging that the interpretation of a statute by one charged with its administration was entitled to great weight, we nonetheless affirmed: ' "Whatever the force of administrative construction ... final responsibility for the interpretation of the law rests with the courts." [Citations.] Admin istrativeregulations that alter or amend the statute or enlarge or impair its scope are void and courts not only may, but it is their obligation to [,] strike down such regulations.' (Id., at p. 748 [63 Cal.Rptr. 689, 433 P.2d 697].)" (Woods v. Superior Court (1981) 28 Cal.3d 668, 679, 170 Cal.Rptr. 484, 620 P.2d 1032, italics added.)

In defining a tax-exempt "occasional sale," section 6006.5 does not require that such a sale be made by a seller who otherwise never has made a taxable sale. The sole focus of the statute is on the nature of the sale under consideration for exemption; while it cannot be one of a series of similar sales, the nonexistence of other, unrelated taxable sales simply is not a condition of exemption from tax under this statute. Rather, the "unitary business" concept of regulation 1595--which purports to add this condition for tax exemption--is a creation of the Board, adopted almost 30 years after the enactment of...