Szabo Food Service, Inc. v. State Bd. of Equalization

• Decision Date: 20 March 1975
• Citation: 46 Cal.App.3d 268,119 Cal.Rptr. 911
• Court: California Court of Appeals Court of Appeals
• Parties: SZABO FOOD SERVICE, INC., OF CALIFORNIA, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Appellant. Civ. 43995.

Page 911

119 Cal.Rptr. 911

46 Cal.App.3d 268

SZABO FOOD SERVICE, INC., OF CALIFORNIA, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Appellant.

Civ. 43995.

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

March 20, 1975.

Rehearing Denied April 17, 1975.

Hearing Denied May 14, 1975.

Evelle J. Younger, Atty. Gen., by Mark W. Jordan, Deputy Atty. Gen., for defendant and appellant.

Gibson, Dunn & Crutcher, James M. Murphy, Robert A. Miller and Marc R. Isaacson, Los Angeles, for plaintiff and respondent.

FLEMING, Associate Justice.

The State Board of Equalization appeals a judgment which sustained the claim of Szabo Food Service, Inc. of California for a refund of $32,582.08 plus interest for sales taxes paid under protest. (Rev. & Tax.Code, § 6001 et seq.) ¹

The stipulated facts in summary: Szabo operated cafeterias on the premises of public and private employers. The employers provided the cafeterias as a convenience to their employees because of a lack of adequate nearby reasonably-priced food facilities. The employers provided the physical plant and equipment; Szabo hired and trained cafeteria personnel, purchased, prepared and served the food, purchased maintenance supplies and services, and provided bookkeeping and administrative services.

Szabo entered a management operating agreement with each employer. Szabo retained little control over income and expenses since each employer determined or approved food prices and set cafeteria locations and hours. Prices were based on projected operating results and were in substantial relation to costs, but profitability varied from item to item and from cafeteria to cafeteria. The agreements therefore provided for Szabo to recover from cafeteria sales its expenses plus a management fee based on a percentage of cafeteria sales (four or five percent) or on a fixed the ($300 to $500 per four-week operating period.) If cafeteria sales exceeded the total of Szabo's expenses plus its management fee (as it did in some cases), Szabo would pay the excess to the employer; if cafeteria sales fell short of that total (as it did in the majority of cases), the employer would make up the deficit.

Between 1960 and 1966 Szabo's total cafeteria sales under the management agreements approached $8,000,000 and total subsidies from employers amounted to more than $1,000,000. ² In no case did an employer subsidy exceed thirty percent of sales. Szabo reported and paid sales taxes only on amounts received from employees for cafeteria sales. The Board assessed the subsidies received from employers as part of gross receipts from the sale of cafeteria meals and collected additional sales taxes plus interest and penalties on these sums.

From the stipulated facts the trial court found that subsidies paid by employers under the management agreements were not subject to sales tax, and, without limiting that general finding, that management fees included in the subsidies were not subject to sales tax.

A threshold problem concerns the scope of judicial review of the Board's assessment of sales taxes on the employer subsidies. The Board characterizes its assessment as an administrative 'classification,' to which the judiciary should give great deference and which it may overturn only if made arbitrarily and capriciously. (See Henry's Restaurants of Pomona, Inc. v. State Bd. of Equalization, 30 Cal.App.3d 1009, 1020--1021, 106 Cal.Rptr. 867; L.A.J., Inc. v. State Bd. of Equalization, 38 Cal.App.3d 549, 552, 113 Cal.Rptr. 319; Mission Pak Co. v. State Bd. of Equalization, 23 Cal.App.3d 120, 124--125, 100 Cal.Rptr. 69.) However, this is not a classification case. The Board has not adopted any formal regulation interpreting employer subsidies. (See § 7051 and Gov.Code, § 11420 et seq.) Since Szabo has challenged the Board's finding that the employer subsidies are subject to sales tax, the Board's finding becomes subject to judicial review for errors in factual analysis and legal interpretation. (Marchica v. State Bd. of Equalization, 107 Cal.App.2d 501, 513, 237 P.2d 725.) Because the facts are undisputed, only the problem of applying the sales tax statute to the facts remains. (See King v. State Bd. of Equalization 22 Cal.App.3d 1006, 1012, 99 Cal.Rptr. 802.)

The Sales tax is a tax on the privilege of selling tangible personal property at retail. (§ 6051.) A Sale is a transfer of tangible personal property for a consideration. (§ 6006.) A sale at Retail is one for any purpose other than resale in the regular course of business in the from of tangible personal property. (§ 6007.) And Gross receipts mean the total amount of the retail sale without any deduction for (a) the cost of the property sold, (b)...