Searles Valley Minerals Operations v. State

• Decision Date: 26 February 2008
• Docket Number: No. D049905.,D049905.
• Court: California Court of Appeals Court of Appeals
• Parties: SEARLES VALLEY MINERALS OPERATIONS, INC., et al., Plaintiffs and Appellants, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

72 Cal.Rptr.3d 857

160 Cal.App.4th 514

SEARLES VALLEY MINERALS OPERATIONS, INC., et al., Plaintiffs and Appellants, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

No. D049905.

Court of Appeal, Fourth District, Division 1.

February 26, 2008.

Winston & Strawn, Charles J. Moll III, Robert A. Julian and Nicole P. Dogwill,

San Francisco, for Plaintiffs and Appellants.

Edmund G. Brown Jr., Attorney General, W. Dean Freeman, Supervising Deputy Attorney General, Domini Pham and Leslie Branman Smith, Deputy Attorneys General for Defendant and Respondent.

McINTYRE, J.

The California Sales and Use Tax Law generally imposes a sales tax on a retailer for the privilege of selling tangible personal property at retail and a comparable tax (known as a use tax) on tangible personal property that is purchased from a retailer outside the state but that is thereafter stored, used or consumed by the purchaser within the state. (Rev. & Tax.Code, §§ 6002, 6051; all further statutory references are to this code except as otherwise noted.) Where, however, a purchaser buys or uses tangible personal property for resale in the regular course of its business, neither of these taxes applies. (§§ 6007, 6008, 6009.)

This case presents the issue of whether coal that is purchased outside California and used by the purchaser to produce electricity in the state is subject to the California use tax. The answer to this fundamental issue requires a resolution of two underlying questions: (1) whether the electricity is "tangible personal property" for purposes of the Sales and Tax Law, such that the coal used to produce it might qualify as having been purchased for resale; and (2) whether the coal (through its chemical energy) was incorporated into the electricity, thus qualifying its purchase as one for resale, or was instead consumed in the process of generating the electricity.

As explained below, we conclude that electricity is "tangible personal property" under the Sales and Use Tax Law, but that the coal is not incorporated into the electricity and thus is subject to the California use tax. Accordingly, we affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

Searles Valley Minerals Operations, Inc. (formerly known as IMC Chemicals, Inc.), Oak Power Corp., Ltd., Rio Bravo Poso, Rio Bravo Jasmin and Ace Cogeneration Company, LP (collectively, the Taxpayers) produce and sell electricity to California consumers. In their production plants, crushed coal is combusted to heat boilers and create high pressure steam, which is fed into turbines and causes them to rotate a magnet inside a generator, which in turn produces the electricity.

The Taxpayers purchase their coal from sellers outside of California and do not pay any sales taxes on those purchases. They originally paid more than $5 million in use taxes to California for the coal they purchased between July 1999 and September 2002, but later filed claims for refunds of those taxes with the State Board of Equalization (the Board). The Board denied a refund on several grounds, including that electricity is not tangible personal property and that the coal was not incorporated into the electricity, but was instead a manufacturing aid and was taxable as such.

After an unsuccessful administrative appeal of the Board's decision, the Taxpayers filed this action in the superior court, seeking a refund of the taxes paid. For the purposes of trial, the parties stipulated to the foregoing facts and that the Taxpayers purchased coal based on specific representations as to the coal's nominal calorific value, stated in British Thermal Units (BTUs), and that their purchase prices for the coal were subject to adjustment for any deviations between the delivered coal's represented values and the actual values as determined through sample testing.

At trial, the Taxpayers contended that electricity is "tangible personal property" for purposes of the Sales and Use Tax Law. They further argued that because the coal's energy was converted into the electricity, the purchases of the coal were for the purpose of resale and thus no use tax should have been imposed with respect to the use, storage or consumption of the coal. In support of their latter argument, the Taxpayers introduced expert testimony that coal contains "chemical" or "internal" energy, which is released "under the right conditions" (to wit, upon being combusted with oxygen) to produce thermal energy. Their expert testified that the energy in the coal is "potential" in nature, in that it must be "released" before it becomes physical, which he defined as "having material existence perceptible through the senses[.]" He further testified that the coal's physical representation (its mass) is consumed as a result of the combustion, but that its chemical energy is released in the process.

The Board disagreed with the contention that the coal was incorporated into the electricity and elicited an admission from the Taxpayers' expert that there are no coal molecules present in the electricity produced. It also introduced evidence that all fuels contain potential energy and that any fuel source used in an electrical generation process involving the use of steam would be utilized in the same way, i.e., it would be burned to release chemical energy that would heat the water. The Board also argued that even if coal had been incorporated into the electricity, the purpose of the coal purchases was not for resale because, under existing legal precedent, electricity is not "tangible personal property" and thus its sale could not qualify as a resale of the coal.

Based on a consideration of the evidence and the arguments of the parties, the trial court issued a lengthy and thoughtful statement of decision in which it concluded that, for purposes of the Sales and Use Tax Law, electricity constitutes "tangible personal property." It also found that the coal purchases were nonetheless subject to the use tax because the coal was not incorporated into the electricity, but was instead used as a catalyst to produce that final product, electricity. The court entered judgment in favor of the Board and the Taxpayers appeal.

DISCUSSION

1. The Taxpayers' Requests for Judicial Notice

In the proceedings below, the taxpayers requested that the trial court take judicial notice of materials contained on the website pages of the American Coal Foundation and the U.S. Department of Energy pursuant to Evidence Code section 452, subdivision (h), which permits a court to take judicial notice of "[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy." The trial court denied the request and the Taxpayers contend on appeal that it erred in doing so. We reject their contention.

A court may not take judicial notice of any matter "unless authorized or required by law." (Evid.Code, § 450.) The Taxpayers, however, cite no legal authority establishing the propriety of taking judicial notice of these websites. Further, although it might be appropriate to take judicial notice of the existence of the websites, the same is not true of their factual content. (See Mangini v. R.J. Reynolds Tobacco Co. (1994) 7 Cal.4th 1057, 1063-1064, 31 Cal.Rptr.2d 358, 875 P.2d 73 [recognizing that although public documents may be proper subjects for judicial notice, the truth of the matters stated in such documents is not], overruled on other grounds by In re Tobacco Cases II (2007) 41 Cal.4th 1257, 1262, 63 Cal.Rptr.3d 418, 163 P.3d 106; accord Starkman v. Mann Theatres Corp. (1991) 227 Cal.App.3d 1491, 1501, fn. 5, 278 Cal.Rptr. 543.) For these reasons, we conclude that the trial court properly denied the Taxpayers' request for judicial notice.

In response to our request for further briefing on the significance of sections 6353 and 6358.1, the Taxpayers also request that we take judicial notice of certain portions of the legislative history of the former. We grant this unopposed request. (Evid.Code, § 452.)

2. Overview of Applicable Sales and Use Tax Principles

As noted above, California imposes a sales tax on all retailers "[f]or the privilege of selling tangible personal property at retail"; the tax is measured as a percentage of the retailer's gross sales receipts in the state. (§ 6051.) A retail sale is defined as "a sale for any purpose other than resale in the regular course of [the purchaser's] business in the form of tangible personal property." (§ 6007.) A sale of tangible personal property is presumed to be for retail and the seller bears the burden of proving otherwise. (§ 6091; see Yamaha Corp. of America v. State Bd. of Equalization (1999) 73 Cal.App.4th 338, 348, 86 Cal.Rptr.2d 362; Associated Beverage Co. v. Board of Equalization (1990) 224 Cal.App.3d 192, 210, 273 Cal.Rptr. 639.)

Where a purchaser buys tangible personal property outside California, the state does not collect a sales tax on those purchases, even for items that are intended for use or. consumption here. To prevent retailers who sell products in California from being placed at a disadvantage relative to their foreign competitors, however, the state imposes a comparable excise tax on any person who stores, uses or consumes here tangible personal property that is not otherwise subject to the sales tax. (§§ 6201, 6202, 6401; Union Oil Co. v. State Bd. of Equalization (1963) 60 Cal.2d 441, 449-451, 34 Cal.Rptr. 872, 386 P.2d 496; Lyon Metal Products, Inc. v. State Bd. of Equalization (1997) 58 Cal.App.4th 906, 910, 68 Cal.Rptr.2d 285; see also § 6406 [the taxpayer is entitled to a credit for any sales or use tax paid to the state in which the goods were purchased].) 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...