Zee Toys Inc. v. County of Los Angeles

Decision Date25 October 1978
Citation149 Cal.Rptr. 750,85 Cal.App.3d 763
CourtCalifornia Court of Appeals Court of Appeals
Parties, 1 ITRD 1812 ZEE TOYS, INC., Formosa Plastics Group (U.S.A.), Inc., Plaintiffs and Respondents, v. COUNTY OF LOS ANGELES and City of Long Beach, Defendants and Appellants. SEARS, ROEBUCK AND CO., a corporation, Plaintiff and Respondent, v. COUNTY OF LOS ANGELES and City of Compton, Defendants and Appellants. Civ. 52977, Civ. 53695 and Civ. 53306.

John H. Larson, County Counsel, James Dexter Clark, Deputy County Counsel, Los Angeles, for defendants and appellants.

Baker, Ancel & Redmond, Gerald T. Manpearl and Thomas C. Corcovelos, Los Angeles, for plaintiffs and respondents Zee Toys and Formosa Plastics.

Loeb & Loeb, Frank M. Keesling, Andrew S. Garb and Thomas W. Henning, Los Angeles, for plaintiff and respondent Sears, Roebuck & Co.

POTTER, Acting Presiding Justice.

These consolidated appeals are from summary judgments in two superior court actions which grant plaintiffs Zee Toys, Inc and Formosa Plastics Group (U.S.A.), Inc. (Sup.Ct. No. C 179151) and Sears, Roebuck and Co. (Sup.Ct. No. C 191156) refunds of ad valorem taxes paid under protest. In the Zee case, the taxes had been collected for the benefit of defendants County of Los Angeles and City of Long Beach; in the Sears case, the taxes had been collected for the benefit of defendants County of Los Angeles and City of Compton, the city in each case being the situs of the goods taxed.

In both cases, the tax involved was ad valorem taxation levied upon tangible personal property in the possession of plaintiffs stored in warehouses in Los Angeles County on the tax lien dates. Such property had been manufactured outside the United States and brought to this state by the plaintiffs as importers.

The plaintiffs in both actions claimed an exemption from taxation for a percentage of such imported goods in their possession based upon the provisions of Revenue and Taxation Code sections 225 and 225.1. As then in effect, said sections read:

"Personal property manufactured or produced, (1) outside this state and brought into this state for transshipment out of the United States, or (2) outside of the United States and brought into this state for transshipment out of this state, for sale in the ordinary course of trade or business shall be exempt from taxation. The exemption under this section shall not apply to personal property in manufacturing process or production. Such process or production shall not include the breaking in bulk, labeling, packaging, relabeling, or repackaging of such property." (Rev. & Tax.Code, § 225.)

"A person claiming an exemption under Section 225 may either claim this exemption by (1) a percentage method of determining property held for transshipment on hand at a particular location by allocating a portion of the total inventory, using the percentage determined by dividing the total out-of-state shipments by the taxpayer from that location during the preceding year by the total of such shipments from that location during such year, or (2) an actual method as evidenced by contracts of sale in existence on the tax lien date, and a full, true and correct inventory of all property held for transshipment together with the date of receipt of the same, the date of withdrawal of the same, the point of origin thereof, and the point of ultimate destination thereof." (Rev. & Tax.Code, § 225.1.) 1

The facts bearing upon the exempt status of the property were not in dispute. In the Zee case, the declarations showed that the plaintiffs were wholesale importers and distributors of goods manufactured outside the United States and distributed throughout the United States. Upon importation the goods were unloaded from the means of transportation at the plaintiffs' warehouses. They were then sorted by type and stored as inventory awaiting sale to plaintiffs' wholesale customers. Such inventory was normally "turned over" or replaced four to five times per year. While the goods were so stored, ad valorem property taxes were levied by defendants. Zee claimed that 90 percent of the inventory taxed was exempt and showed by uncontradicted declarations that during the year preceding the lien date, 90 percent of Zee's total shipments from the warehouses were to customers located outside of the State of California [85 Cal.App.3d 768] and 10 percent of such shipments were to customers located inside the State of California. Comparable percentages for Formosa were 63 percent of total shipments to customers located outside the State of California and 37 percent to customers located inside the state. In both instances, the declarations showed that none of the property was "in a manufacturing process or production."

Both Zee and Formosa filed claims for exemption which were denied. Thereafter they paid the taxes under protest and exhausted their administrative remedies before bringing suit. A declaration filed in behalf of defendants stated, without contradiction, that "there is a flow of traffic of substantial proportions by which goods arrive in California from other states for distribution throughout the United States or throughout various regions of the United States."

There was a stipulation of facts in the Sears case. This stipulation showed that the goods which were the subject matter of the litigation were manufactured or produced outside the United States and imported by Sears and placed in distribution warehouses "where they are held awaiting distribution to destinations both within and outside of the state . . . for the purpose of sale in the ordinary course of Sears' trade or business" which was "selling goods at retail." "The distribution warehouses located in the County of Los Angeles were devoted almost entirely to the distribution of goods which were imported from foreign countries, particularly from locations in the Pacific area." Sears had other warehouses not in the County of Los Angeles for the purpose of long-term storage. The rate of turnover at the distribution warehouses averaged approximately three times per year. The goods were "meant to be shipped as quickly as distribution operations permit." Though no percentage was stated in the stipulation, the respective volumes of California and out-of-state shipments from the warehouses during the year preceding March 1, 1976, and the inventory on that date, were stated in an exhibit which resulted in a claim of exemption for property having a value of $19,373,089 by application of the percentage method specified in Revenue and Taxation Code section 221.5, subdivision (1).

The stipulation further stated that "Sears paid said tax under protest, claiming an exemption pursuant to Revenue and Taxation Code Sections 225 and 225.1, and thereafter duly exhausted its administrative remedies. No refund of any portion of said taxes was made to Sears, and this action was duly commenced."

Cross-motions for summary judgment were made by defendants in both cases. The motions of plaintiffs in each case were granted, and the cross-motions were denied. Judgments were entered for plaintiffs for refunds for the amount of their claims.

Contentions

The contentions of the respective parties are substantially similar in both cases. Defendants contend that (1) the exemption provided by Revenue and Taxation Code section 225 does not apply to the inventory of plaintiffs because, properly construed, such section provides only for the exemption of goods "in transit" through the state; (2) if section 225 is construed to exempt imported goods being held here at the pleasure of the owner for disposal or use, it violates the United States Constitution by regulating interstate and foreign commerce and interfering with foreign affairs, since it extends no such exemption to interstate goods; (3) defendants have standing to raise this constitutional objection; and (4) the proper remedy is to invalidate the exemption, not extend it to interstate goods similarly held in this state.

Plaintiffs contend that (1) the clear language and purpose of Revenue and Taxation Code section 225 makes its exemption applicable to their imported goods, and forecloses the restrictive interpretation advanced by defendants; (2) defendants have no standing to raise their constitutional objection; (3) section 225 does not violate the United States Constitution; and (4) even if the selective exemption is invalid, the court has the power to correct the defect by extending the exemption to interstate goods.

Discussion
Summary

The language of Revenue and Taxation Code sections 225 and 225.1 is unequivocal. It does not simply codify the existing constitutional exemption of goods "in transit." Since it contains no ambiguity in this respect, it cannot be so interpreted to avoid constitutional objections. The selective exemption of goods of foreign origin, thereby giving them a competitive advantage over interstate goods, is a regulation of interstate and foreign commerce in violation of the Commerce Clause in the United States Constitution. It is, therefore, invalid. Defendants have standing to raise this constitutional objection. The proper remedy is to invalidate the exemption, not extend it to interstate goods.

Revenue and Taxation Code Sections 225 and 225.1 Clearly Exempt the Property in Issue

Section 225 exempts "property manufactured or produced . . . (2) outside of the United States and brought into this state For transshipment out of this state, for sale in the ordinary course of trade or business . . . ." (Italics added.) The exemption does not apply to "personal property in manufacturing process or production" but "(s)uch process or production shall not include the breaking in bulk, labeling, packaging, relabeling, or repackaging of such property."

Section 225 does not define "transshipment." Defendants point to dictionary definitions of "transshipment": for example, "to transfer...

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