Wallace Berrie & Co. v. State Bd. of Equalization, L

CourtUnited States State Supreme Court (California)
Writing for the CourtREYNOSO; BIRD
Citation707 P.2d 204,40 Cal.3d 60,219 Cal.Rptr. 142
Parties, 707 P.2d 204 WALLACE BERRIE & COMPANY, INC., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. A. 31967.
Docket NumberNo. L,L
Decision Date21 October 1985

Fierstein & Sturman, B.J. Adelson and Mark J. Linder, Los Angeles, for plaintiff and appellant.

John K. Van de Kamp, Atty. Gen., Edmond B. Mamer and Richard E. Nielsen, Los Angeles, for defendant and respondent.

REYNOSO, Associate Justice.

Plaintiff Wallace Berrie & Company, Inc. (Berrie) appeals from a judgment denying recovery of certain taxes paid under protest.

The issue is whether a wholesaler must pay a use tax on product-oriented display racks it provides retailers "free" with a minimum purchase of the merchandise to be displayed. We conclude that the regulation imposing a use tax under these circumstances is valid and the tax must be paid.

The facts are uncontroverted. Berrie, a California corporation, purchases and sells wholesale novelty items, such as stuffed animals, humorous plaques and key chains. Berrie sells the items to retailers throughout the country. In its sales literature, Berrie offers the retailer a "free" disposable cardboard display rack, which advertises a single product line in an eye-catching manner, with a minimum purchase of the stuffed animals to be displayed. The only price stated is the price of the animals, which is the same, with or without the display rack. Retailers ordering multiples of the stated minimum do not necessarily receive more than one rack. Berrie rarely agrees to quantity discounts for its merchandise, and never gives a customer a discount in lieu of the display rack.

Berrie also offers the retailer a nondisposable wire rack for display of other Berrie novelties. The promotional literature states that this rack is available for $24 or $45, depending on size, and comes with some "free" merchandise. The literature also specifies the number of free items included, as well as the regular price of these novelties.

When Berrie purchases the display racks it gives the manufacturer a certificate of resale, thereby avoiding liability for any tax at this point in the transaction. Berrie stores these marketing aids in its California warehouse, and carries them as inventory on its corporate books and records.

Berrie filed quarterly California sales and use tax returns for the years in question--1975 through 1977--but failed to account, in any way, for the display racks for which Berrie had earlier provided resale certificates. After conducting an audit for the three-year period, including an analysis of Berrie's sales literature, the State Board of Equalization (Board) notified Berrie that it was liable for sales tax on the wire display racks and for use tax on the cardboard display racks. The use tax was imposed because Berrie failed to satisfy the provisions of the Board's regulation governing sales of marketing aids. (Cal.Admin.Code, tit. 18, § 1670, subd. (c) (Regulation 1670(c).) 1 As Berrie had not billed customers for the cardboard rack nor raised the price of the merchandise delivered with it, transfer of the rack to the retailer could not be deemed a "sale."

At Berrie's request, the Board conducted a reaudit, ultimately setting the amount due at $39,671.22. Berrie paid the assessment under protest, and then submitted a claim for refund of $38,081.99, representing the use tax portion of the assessment. Berrie asserted that it had recouped more than 50 percent of the purchase price of the cardboard display racks, making transfers of the racks sales, even though Berrie apparently did not consider those transactions to be sales when it chose not to collect sales tax from the retailers who received the racks and failed to include liability for such taxes in its tax returns. The Board denied Berrie's claim.

The trial court, sitting without a jury, ruled in favor of the Board. The court ruled that Regulation 1670(c)'s requirements are not "arbitrary, capricious or patently unreasonable" as they provide the objective criteria necessary for determining whether a marketing aid for which a resale certificate has been given is being sold or given away. As Berrie did not satisfy the regulation it was liable for the assessed use taxes, measured by the price Berrie originally paid for the racks.


We begin our discussion by reiterating the proper standard of review. Where the Board has not adopted a formal regulation addressing a particular tax question, its interpretation of the statutes and existing regulations in assessing taxes due is subject to broad judicial review. " 'The interpretation of a regulation, like the interpretation of a statute, is, of course, a question of law [citations], and while an administrative agency's interpretation of its own regulation obviously deserves great weight [citations], the ultimate resolution of such legal questions rests with the courts. [Citations.]' " (Culligan Water Conditioning v. State Bd. of Equalization (1976) 17 Cal.3d 86, 93, 130 Cal.Rptr. 321, 550 P.2d 593.)

When the validity of a formal regulation is attacked, however, a more limited standard of judicial review applies. "[I]n reviewing the legality of a regulation adopted pursuant to a delegation of legislative power, the judicial function is limited to determining whether the regulation (1) is 'within the scope of the authority conferred' (Gov.Code, § 11373) and (2) is 'reasonably necessary to effectuate the purpose of the statute' (Gov.Code, § 11374.)" (Agricultural Labor Relations Board v. Superior Court (1976) 16 Cal.3d 392, 411, 128 Cal.Rptr. 183, 546 P.2d 687.) "These issues do not present a matter for the independent judgment of an appellate tribunal; rather, both come to this court freighted with [a] strong presumption of regularity...." (Ralphs Grocery Co. v. Reimel (1968) 69 Cal.2d 172, 175, 70 Cal.Rptr. 407, 444 P.2d 79.) Our inquiry necessarily is confined to the question whether the classification is "arbitrary, capricious or [without] reasonable or rational basis." (Culligan, supra, 17 Cal.3d at p. 93, fn. 4, 130 Cal.Rptr. 321, 550 P.2d 593. See also Henry's Restaurants of Pomona, Inc. v. State Bd. of Equalization (1973) 30 Cal.App.3d 1009, 1020-1021, 106 Cal.Rptr. 867; Mission Pak Co. v. State Bd. of Equalization (1972) 23 Cal.App.3d 120, 124-125, 100 Cal.Rptr. 69.)

Despite Berrie's efforts to characterize this case as a challenge to the Board's interpretation of a regulation, it is, in reality, a facial attack on the regulation itself. (Post, fn. 13.) Regulation 1670(c) classifies the transfer of a marketing aid as a sale or as a use depending upon the structure of the transaction. Berrie asserts that the structure of the transaction should not be controlling. Because Berrie questions the validity of the regulation itself, 2 the proper standard of review is whether Regulation 1670(c) is arbitrary, capricious or without rational basis.

Having identified the relevant standard of review, we briefly turn to the purposes and structure of the sales and use tax law upon which Regulation 1670(c) is based. The California Sales and Use Tax Law (Rev. & Tax. Code, § 6001, et seq.) 3 embodies a comprehensive tax system created to impose an excise tax, for the support of state and local government, on the sale, use, storage or consumption of tangible personal property within the state. (See Douglas Aircraft Co. v. Johnson (1939) 13 Cal.2d 545, 90 P.2d 572.) 4 The two taxes, sales and use, are mutually exclusive but complementary, and are designed to exact an equal tax based on a percentage of the purchase price of the property in question. In essence " '[a] sales tax is a tax on the freedom of purchase.... [a] use tax is a tax on the enjoyment of that which was purchased.' " (Union Oil Co. v. State Bd. of Equalization (1963) 60 Cal.2d 441, 452, 386 P.2d 496, 60 Cal.2d 441, quoting McLeod v. J.E. Dilworth Co. (1944) 322 U.S. 327, 330, 64 S.Ct. 1023, 1026, 88 L.Ed. 1304.)

The use tax supplements the sales tax by imposing on those subject to it the same tax burden as would otherwise be assessed under the sales tax. (Rivera v. Fresno (1971) 6 Cal.3d 132, 98 Cal.Rptr. 281, 490 P.2d 793.) For example, the use tax generally applies where a particular transaction is exempt from sales tax, such as one involving goods purchased in another state and stored or used in California. (See Rivera, supra; Bank of America Nat. Trust & Sav. Asso. v. State Bd. of Equalization (1962) 209 Cal.App.2d 780, 26 Cal.Rptr. 348.) Ordinarily the use tax does not apply where a resale certificate is given for purchased goods. However, unless a use tax is assessed if the goods are not subsequently resold but disposed of in another manner, the purchaser may well manage to avoid taxation altogether. Thus, the use tax insures that the basic excise tax will be levied on transactions which might otherwise inequitably escape taxation.

Whether a particular transaction within the state is subject to sales tax ( § 6051) or to use tax ( § 6201) depends primarily on whether the transfer at issue is a sale. 5 The answer, as the case at bench aptly demonstrates, is not always obvious.

The Sales and Use Tax Law broadly defines a "sale" as "[a]ny transfer of title or possession, exchange, or barter ... of tangible personal property for a consideration." (Emphasis added.) ( § 6006, subd. (a).) Absent evidence of receipt of a consideration, the transfer of such property from one party to another, in this case from wholesaler to retailer, does not constitute a sale.

Whether or not a sale has transpired is of central importance in determining tax liability on property for which a resale certificate was originally provided. Where a wholesaler gives a manufacturer a resale certificate for goods purchased, the manufacturer is relieved of liability for sales tax as well as the duty of collecting a use tax. 6 ( § 6092; Cal.Admin.Code, tit. 18, § 1668, subd. (a)(1).) If...

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