Al-Sal Oil Co. v. State Bd. of Equalization

• Decision Date: 26 July 1991
• Docket Number: No. C008319,AL-SAL,C008319
• Citation: 232 Cal.App.3d 969,283 Cal.Rptr. 843
• Court: California Court of Appeals Court of Appeals
• Parties: OIL COMPANY INC., Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.

Page 843

283 Cal.Rptr. 843

232 Cal.App.3d 969

AL-SAL OIL COMPANY INC.,

Plaintiff and Respondent,

v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.

No. C008319.

Court of Appeal, Third District, California.

July 26, 1991.

Daniel E. Lungren, Atty. Gen. and Jack Newman, Deputy Atty. Gen., for defendant and appellant.

Thomas G. Bost, David S. Raab and Latham & Watkins, for plaintiff and respondent.

DAVIS, Associate Justice.

In this tax refund action arising under the Motor Vehicle Fuel License Tax Law (Rev. & Tax Code, § 7301 et seq.), the State Board of Equalization (Board) appeals from a judgment in favor of the taxpayer, Al-Sal Oil Company, Inc. (Al-Sal). The issue is whether Al-Sal was required to pay an excess gallonage tax--applicable to licensed distributors--on its retail sales of straight gasoline during the time it sold such gasoline and blended and sold gasohol. We agree with the trial court that Al-Sal was not required to pay this tax and we therefore affirm the judgment. In arriving at our conclusion we have been forced to make our way through a legislative scheme to simplify state taxation of the gasoline industry. The exercise calls to mind words by U.S. Congressman Delbert L. Latta when confronting a similar scheme: "I hold in my hand 1,379 pages of tax simplification." (On tax reform, quoted in US News & World Report, December 23, 1985.)

BACKGROUND

The Motor Vehicle Fuel License Tax Law

In 1941 the Motor Vehicle Fuel License Tax Law (hereafter, Fuel Tax Law) was enacted, replacing the 1923 Gas Tax Act. (See Rev. & Tax Code, § 7301, Historical Note; § 7305, Code Commission Notes.) The Fuel Tax Law imposes a license tax upon "distributors" for each gallon of fuel they distribute. (Rev. & Tax Code, §§ 7351, 7306; further reference to undesignated sections are to the Revenue and Taxation Code.) A distributor includes every person who "distributes" motor vehicle fuel within the meaning of section 7305. (§ 7306) Section 7305, in subdivisions (a) through (d), defines "distribution" as being comprised of two distinct elements: (1) a "producing, etc." or an "importing" or a "receiving" element; and (2) a "sale" or a "use" or a "delivery" element. Thus, under section 7305, subdivision (a), "distribution" is defined as the producing, refining, or blending of motor vehicle fuel in California, and the sale or use of the fuel in the state. Subdivision (b) has a similar first element, but, among other things, has a different second element: delivery of the fuel. Subdivision (c) of section 7305 defines "distribution" as the importing of motor vehicle fuel into California, and the sale or use of the fuel in the state. Under subdivision (d), "distribution" means the receiving in California of motor vehicle fuel for which there has been no prior taxable distribution, and the sale or use of the fuel in the state. The last subdivision of section 7305 substantively defining "distribution," subdivision (e), specifies in pertinent part: "The withdrawal of motor vehicle fuel from storage in this state for the purpose of the sale ... or use of the fuel in this state if the consummation of that purpose does not otherwise constitute a distribution taxable under [the Fuel Tax Law]...." ¹

Therefore, under subdivisions (a) through (d) of section 7305, a mere sale of fuel does not constitute a taxable "distribution"--the taxable event occurs when a production, or an importation, or a qualified receipt of fuel is coupled with a sale. (§ 7305.) Under subdivision (e) of section 7305, the "distribution" occurs when the fuel is withdrawn from storage for the purpose of sale if that sale does not otherwise result in a taxable distribution. As a result, most deliveries of motor vehicle fuel are taxed only once: under subdivisions (a) through (d), the first time the fuel is sold after having been produced or imported or received; or, under subdivision (e), when the fuel is withdrawn. (§§ 7305, 7354.) This principle is expressed in section 7354, which states that the license tax is generally imposed upon only one distribution of the same motor vehicle fuel.

There is an exception to this principle, however. Motor vehicle fuel expands at warm temperatures and contracts at colder ones. As a consequence, the volume of fuel sold by a retailer (the term "retailer" is used in its ordinary sense) may be smaller or larger than the volume acquired tax-paid from a distributor. If such expanded fuel is sold at retail, no additional tax liability is generally incurred. If such expanded fuel, however, is in some way "redistributed" by a distributor or a broker, sections 7356 and 7356.5 impose a license tax on the volume of redistributed fuel that is greater than the volume of tax-paid fuel taxed in the initial distribution. This is known as the "excess gallonage" tax. ² The amount of "excess gallonage" is calculated either by simply comparing the different fuel volumes at issue or by comparing the distributed, tax-paid volume measured on a temperature-corrected basis (that is, the volume is measured by assuming the fuel was delivered at a temperature of 60 degrees Fahrenheit--see § 7355) with the actual expanded volume redistributed at temperatures above 60 degrees. (§§ 7355, 7356, 7356.5.)

The Facts Of This Case

Al-Sal is a family-owned and operated company that owns retail self-service gasoline stations in Southern California. From the date of its incorporation, September 1, 1971, until July 1, 1982, Al-Sal never incurred any tax liability under the Fuel Tax Law. On July 1, 1982, Al-Sal obtained a distributor's license under section 7451 to blend gasoline and alcohol to produce gasohol for sale at some of its service stations. (Distributor licenses are issued generically to any person who is a distributor; these licenses do not correspond to any particular distribution activities. (§§ 7451, 7305.)) Al-Sal held its distributor's license until January 31, 1985.

To produce the gasohol, Al-Sal would hire trucking companies to drive to refineries or distribution centers and fill each truck with approximately 8,100 gallons of gasoline. Each truck then proceeded to an alcohol distribution center and added about 900 gallons of alcohol. After this, the trucks drove to retail service stations owned by Al-Sal; in the process, the gasoline and alcohol were blended in the tanks of the trucks. The trucks then deposited the gasohol in underground tanks connected directly to gasohol pumps for retail sales to Al-Sal customers. The gasoline used in this process was purchased on a tax-paid basis; the alcohol was not. During the period Al-Sal held its distributor's license, gasohol sales comprised 10 percent of Al-Sal's total retail motor vehicle fuel sales.

At all relevant times, Al-Sal sold straight gasoline at its retail service stations. To obtain this gasoline, Al-Sal would hire trucking companies to drive to refineries or distribution centers and fill each truck with approximately 9,000 gallons of gasoline. The trucks then proceeded to stations owned by Al-Sal and deposited the gasoline into underground tanks connected directly to gasoline pumps for retail sales to Al-Sal customers. All of this gasoline was purchased tax-paid on a temperature-corrected basis. (See § 7355, subd. (e).)

In conducting an audit, the Board determined that during the time Al-Sal held its distributor's license--that is, from July 1, 1982, to January 31, 1985--Al-Sal was liable under sections 7356 and 7356.5 for tax on that part of its retail sales which reflected the expansion of fuel due to warm weather. The Board assessed this tax on both Al-Sal's gasohol sales and on its straight gasoline sales. Specifically, the tax on Al-Sal's straight gasoline sales was assessed by comparing the volume of gasoline Al-Sal bought tax-paid on a temperature-corrected basis (this volume was measured as if the gasoline had been delivered to Al-Sal at a temperature of 60 degrees Fahrenheit) with the expanded volume actually sold to retail customers during warmer weather. This tax was assessed only during the period that Al-Sal held its distributor's license. Both before and after that period, Al-Sal sold straight gasoline through its service stations without incurring the tax. In fact, the Board's auditor advised Al-Sal to relinquish its distributor's license to a related entity to prevent the tax assessment, which Al-Sal did with the advised effect on January 31, 1985.

Al-Sal concedes the "excess gallonage" tax under sections 7356 and 7356.5 is applicable to its gasohol sales because it blended gasoline and alcohol--by adding non-taxed alcohol to gasoline--and sold the blend as gasohol. (See § 7305, subd. (a).) Al-Sal disputes that its straight gasoline sales were subject to the excess gallonage tax during the period Al-Sal held its distributor's license from July 1, 1982, to January 31, 1985.

DISCUSSION

The Board posits two alternative bases for imposing the "excess gallonage" tax on Al-Sal's retail sales of straight gasoline during the time Al-Sal was a licensed distributor. First, the Board contends that "distribution" as defined in section 7305, subdivision (e), provides the definition for the term "redistributes" in sections 7356 and 7356.5. Alternatively, the Board contends the term "redistributes" in sections 7356 and 7356.5 is to be given its ordinary meaning of placing in the stream of commerce and does not mean the same thing as "distribution" in section 7305. Neither of these contentions has merit. As we read the statutory scheme of the Fuel Tax Law, it provides no basis upon which to impose an "excess gallonage" tax on Al-Sal's already tax-paid retail sales of straight gasoline during the time Al-Sal held a distributor's license to blend and sell gasohol.

The interpretation of a statute presents a question of law which we determine independently. (9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, §§ 241-242, pp. 246-247.) Certain rules of construction guide our...