Peterson Tractor Co. v. State Bd. of Equalization

• Decision Date: 31 January 1962
• Citation: 199 Cal.App.2d 662,18 Cal.Rptr. 800
• Court: California Court of Appeals Court of Appeals
• Parties: PETERSON TRACTOR CO., a Nevada Corporation, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Appellant. Civ. 19982.

Page 800

18 Cal.Rptr. 800

199 Cal.App.2d 662

PETERSON TRACTOR CO., a Nevada Corporation, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Appellant.

Civ. 19982.

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

Jan. 31, 1962.

Rehearing Denied Feb. 15, 1962.

Hearing Denied March 28, 1962.

Stanley Mosk, Atty. Gen., Ernest P. Goodman, John J. Klee, Jr., Deputy Attys. Gen., for appellant.

Fitzgerald, Abbott & Beardsley, Oakland, for respondent.

SULLIVAN, Justice.

Plaintiff Peterson Tractor Co. (hereafter referred to as Peterson) brought this action to recover sales taxes, together with interest collected by the State Board of Equalization for the period April 1, 1955, to March 31, 1958. For convenience we will refer to the defendant as the board. The case was tried upon a written stipulation of facts with exhibits attached thereto, without the introduction of any oral or other documentary evidence. From a judgment in favor of Peterson, the board appeals.

Peterson is a Nevada corporation, qualified to do business in California, with its principal place of business in San Leandro, Alameda County. It is the Caterpillar tractor dealer in the San Francisco bay area and northern Sacramento valley. During the periods here involved, it was a retailer within the meaning of the California Sales and Use Tax Law. Peterson purchased all of the items, the lease and sale of which are here in controversy, for resale and gave resale certificates to the vendors thereof pursuant to the Sales and Use Tax Law. It paid no use tax to the state with respect to the leasing of these items.

Many of Peterson's sales of heavy equipment were made to customers, who, at the time, were leasing the equipment to be purchased. In such situations, it was Peterson's practice to credit, as a down payment, the total amount of the rentals paid against an originally stated selling price. In addition, the lessee who indicated a desire to purchase the equipment was required to pay an amount denominated by Peterson as 'interest on the deferred balance.' The controversy before us arose out of such sales made after a period of leasing and is limited to the above-mentioned 'interest on the deferred balance.' Peterson contends that such amount was not includable in the gross receipts of the sale and therefore not subject to tax. The board contends that it is a part of the gross receipts and therefore is taxable.

In their written stipulation of facts filed with the trial court, the parties set forth a hypothetical example as the best way of demonstrating the nature of the above 'interest on the deferred balance' and the transaction as a whole. We give the following summary of their example: A customer wished to acquire a Caterpillar tractor which ordinarily sold for a total selling price (including sales tax) of $30,000. The customer, however, did not wish to make the down payment necessary in order to purchase on a conditional sales contract. He was told he could lease the tractor for six months at a monthly rental of $2,000, and that if at any time during the lease term or at the end of the term, he should desire to purchase the tractor, it was Peterson's practice ot consider the total rental payments made as a down payment on the sale. In the event of such an election, the customer would also be required to pay an additional amount denominated 'interest on the deferred balance.' With that understanding in mind, the customer decided to lease the tractor.

The last mentioned amount of 'interest on the deferred balance' was a total of a series of computations (one for each month the lease is in effect prior to the sale) made by applying an agreed percentage rate to the difference between the originally stated selling price and the amount of rentals paid up to the month computed. In the hypothesis adopted by the parties, where a tractor with an originally stated selling price of $30,000 (including sales tax) was leased for a six-month term at a tental of $2,000 per month payable in advance, upon the lessee expressing a desire to purchase, the total rental paid in the sum of $12,000 was credited as a down payment. The 'interest on the deferred balance' was computed as follows: For the first month 6 per cent of $28,000 ($30,000 less the first month's rent) divided by 12; for the second month, 6 per cent of $26,000, similarly calculated; for the third month, 6 per cent of $24,000, and so on for each of the six months. In the example used such calculations produced a total sum of $690. So in the hypothetical case, the customer would have to pay $18,000 ($30,000 less credit for $12,000 rent) plus $690 'interest on the deferred balance.'

The lease and subsequent sale, if any, would be carried out in the following manner: A document designated 'Purchaser's Order' would be executed by Peterson and the customer. Such document (attached by the parties as an exhibit to their stipulation of facts) was a printed order form of Caterpillar. Peterson's name and address were inserted as distributor or dealer. In its tenor, the document is a request or order by the customer to ship through Peterson a specifically described tractor 'for which the undersigned agrees to pay f. o. b. San Francisco $30,000.' It states selling price, the separately stated sales tax and the sum of $30,000 (under the hypothesis) as the total thereof. Blanks provided for the terms of the payment, however, are not filled in. Instead, appear the words: 'Rental--$2000.00 per month, 6 months rental guaranteed.' Immediately below the foregoing appears the following: 'The deferred balance is to bear interest at 6% per year until final payment is made,' all of which words are part of the printed order form except the numeral '6' which is typed. (The parties, however, stipulated that the percentage rate of 6 per cent 'is illustrative only.') The order was signed by the customer and accepted and signed by Peterson.

When the customer took delivery of the tractor, a rental agreement (also attached as an exhibit by the parties) would be signed by Peterson as lessor and the customer as lessee, for a term of six months at the above monthly rental of $2,000, such agreement containing many of the usual covenants but making no mention of 'interest on the deferred balance.' After the rental agreement was executed, the relationship of Peterson and the customer was, according to the stipulation of the parties, 'solely one of lessor and lessee.' The customer's only obligation was to pay the agreed rent for the term of the lease. He had neither an option nor an obligation to purchase. Peterson had no obligation to sell. The above mentioned purchaser's order was retained by Peterson 'solely as a salesman's memorandum of the transaction.'

If the customer later desired to purchase the tractor, either during the term of the lease or at the end thereof, the sale would be handled in one of three ways:

(a) The most common method was to finance on a conditional sales contract the difference between the originally stated selling price and the rentals paid (i. e., $30,000 less $12,000 or $18,000) and to bill directly for the additional amount of 'interest on the deferred balance' ($690). The purchaser would be sent three invoices. The first would indicate the originally stated selling price (including separately stated sales tax), that the purchaser was credited with the amount of rentals paid ($12,000) and that the difference ($18,000) was carried as a balance forward to the conditional sales contract. The second invoice would be for interest on the amount to be financed by the conditional sales contract. The purchaser and Peterson would execute a conditional sales contract to secure the payment of the last two amounts over a period of months. The third invoice would be for the 'interest on the deferred balance' which would be due 'net cash on presentation of invoice.'

(b) The second method of handling the sale was to finance the 'interest on the deferred balance' along with the other two amounts. The purchaser would again receive three invoices. The first would be the same as hereinabove explained, namely for the difference between the originally stated selling price and the rentals received. The second would be for the 'interest on the dererred balance,' except that it would indicate that the charge was carried forward to the conditional sales contract. The third would be for the interest on the total amount to be financed, under this method $18,690 instead of $18,000.

(c) Under the third method, all of the $18,690 would be paid in cash. The customer would be sent two invoices. The first invoice was in the same form and amount as that used in the first method, except that the terms would be 'net cash on presentation' rather than 'to conditional sales contract.' The second invoice would be for the 'interest on the deferred balance' and in the same form and amount as noted in the first method above.

If the lessee did not desire to purchase the leased equipment, his only obligation was to pay the agreed rental and comply with the other covenants of the lease, including that requiring the return of the equipment upon the termination of the lease. In such event, he would not be required to pay the 'interest on the deferred balance.'

Peterson received no monies or compensation in any other form, either for the lease or for the sale, other than those which we have heretofore set forth.

The written stipulation of the parties further provides that the aofrementioned rental agreements 'are bona fide leases and not leases 'in lieu of a transfer of title, exchange, or barter' within the meaning of section 6006 of the Revenue and Taxation Code.'

Peterson paid the sales tax for the period in question, measured by the originally stated selling price ($30,000) less the separately stated sales tax ($1,153.84 in the hypothesis used). Upon such hypothesis,...