J. Beck v. State Bd. of Equalization

Filed 10/12/06 J. Beck v. State Bd. of Equalization CA4/1

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COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from a judgment of the Superior Court of San Diego County, Joan M. Lewis, Judge. Affirmed.

J. Beck, Inc., dba Beck Steel (Beck) appeals the trial court's decision sustaining the demurrer filed by the State Board of Equalization (the Board) to Beck's first amended complaint, which sought a refund of $658,216.86 for the use tax paid by Beck from the fourth quarter of 1999 through the third quarter of 2002. As we explain, we conclude that Beck's position is without merit, and accordingly we affirm the trial court.

I

FACTUAL AND PROCEDURAL BACKGROUND

According to Beck, "[d]uring the fourth quarter of 1999, through and including the third quarter of 2002, [it] entered into various lump sum service contracts to provide supervision, project management, labor, testing, shop drawings" and other services related to the installation of fabricated steel on a variety of construction projects, and "[a]s an incidental part of the subject contracts, [Beck] would . . . provide certain materials . . . ."

For the construction jobs at issue, Beck alleged that it bought the materials outside of California (the Out-of-State Purchases) and did not pay any sales tax on the Out-of-State Purchases.

Beck self-assessed and paid use tax to the State of California. However, in December 2002, Beck determined that it had erroneously self-assessed its use tax liability for the fourth quarter 1999 through the third quarter 2002 in the total amount of $658,216.86, and it filed a claim with the Board for return of taxes paid (the refund claim). The refund claim, which is incorporated into the pleadings in this case, stated that Beck's overpayment was caused by "failure to treat [Beck] as a consumer of materials under [California Code of Regulations, title 18, section 1521.]"

In August 2004, the Board's appeal division issued a recommendation and decision denying Beck's refund claim, and, after conducting a hearing at Beck's request, the Board issued a notice denying the refund claim in February 2005.

Having exhausted its administrative remedies, Beck then filed a complaint against the Board in the trial court, pursuant to Revenue and Taxation Code^[1] section 6933, seeking a refund in the amount of $658,216.86 for erroneously paid use tax. The Board demurred, and the trial court sustained the demurrer with leave to amend.

Beck filed a first amended complaint (Complaint). Beck alleged that it "is entitled to a refund . . . because of the fact that the contracts in issue are lump sum service contracts with the true object of the contracts being the expert services provided by [Beck] and that any materials provided by [Beck] in connection with the services were incidental to the true object of the contracts. As such, the various transactions involving the use of the materials in California are exempt from the sales and use tax laws, and, therefore, no sales or use tax is owed by [Beck]."

The Board demurred again. The Board argued that Beck's California use tax liability arose from its Out-of-State Purchases, in which Beck, acting as a consumer, purchased the materials from an out-of-state vendor, without paying sales tax, and for use in California construction projects.

The trial court sustained the demurrer without leave to amend. It pointed out that "materials purchased from an out of state supplier can be subject to a use tax," and "because [Beck], as a consumer, purchased materials out of state a use tax is owed for the purchase of those materials."

Beck appeals the trial court's decision sustaining the demurer.

II

DISCUSSION

A. Standard of Review

" 'On appeal from an order of dismissal after an order sustaining a demurrer, our standard of review is de novo, i.e., we exercise our independent judgment about whether the complaint states a cause of action as a matter of law.' " (Los Altos El Granada Investors v. City of Capitola (2006) 139 Cal.App.4th 629, 650.) In reviewing the complaint, we must assume the truth of all facts properly pleaded by the plaintiff. (Howard Jarvis Taxpayers Assn. v. City of La Habra (2001) 25 Cal.4th 809, 814.)

B. California's Use Tax

Because this case concerns a challenge to the imposition of the California use tax, we first provide an overview of the nature and purpose of that tax.

A use tax is applied to the storage, use or other consumption of tangible personal property in California in instances where California sales tax does not apply. (See §§ 6201, 6202, 6401.)^[2] The person who stores, uses or otherwise consumes the property is liable for the payment of the use tax.^[3] (§ 6202.) For property purchased out of state and consumed in California, "the use tax takes the place of the sales tax in order that retailers who sell products in California will not be placed at a disadvantage as compared to those who buy products for use in California." (Union Oil Co. v. State Bd. of Equal. (1963) 60 Cal.2d 441, 450-451.) The use tax and sales tax " 'are complemental to each other with the aim of placing the local retailers and their out-of-state competitors on an equal footing.' " (Id. at p. 449.) "[T]he sales and use tax laws constitute a double filter designed to catch all transactions which result in tangible personal property joining the aggregate of capital assets within this state." (Ibid.)

C. Beck Properly Paid Use Tax Based on the Out-of-State Purchases

Applying the statutory criteria for use tax liability that we have discussed above, (see §§ 6201, 6401), it is clear from the facts pled in the Complaint that Beck is liable for the payment of California use tax. First, as alleged in the Complaint, Beck purchased the construction materials at issue outside of California. Second, construction materials, such as the steel at issue here, qualify as " '[t]angible personal property,' " which is defined as "personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses." (§ 6016.) Third, Beck used those materials in construction projects in California. Fourth, Beck did not pay sales tax when it purchased the materials.^[4] Accordingly, the use tax applies.

Consistent with this conclusion, the regulations promulgated by the Board define the circumstances in which a construction contractor is liable to pay tax on the materials it uses in a construction project.^[5] "Construction contractors are consumers of materials which they furnish and install in the performance of construction contracts. Either sales tax or use tax applies with respect to the sale of the materials to or the use of the materials by the construction contractor." (Cal. Code Regs., tit. 18, § 1521, subd. (b)(2)(A), italics added.) Beck admitted both in its refund claim and in its briefing that it was acting as a consumer of the construction materials. Accordingly, as established by the Board's regulations, "[e]ither sales or use tax applies" to Beck's purchase and use of the construction materials. (Cal. Code Regs., tit. 18, § 1521, subd. (b)(2)(A).) As we have explained, because the materials were purchased out of state without payment of tax, for use in California, the use tax applies.^[6]

Beck relies on Western Concrete Structures, Inc. v. State Bd. of Equalization (1977) 66 Cal.App.3d 543 (Western Concrete) to support its argument, but that case is inapposite. Western Concrete addressed whether a construction contractor who did not actually install the construction materials it provided, but was in several respects contractually responsible for the proper installation of the materials, was liable for the payment of sales tax as a retailer of the materials used in their construction contracts. Western Concrete decided that the construction contractor was not liable for the payment of sales tax because, under the circumstances, it was a consumer of the construction materials, not a retailer. (Id. at pp. 546-547.)

Beck's situation is not addressed by Western Concrete. Unlike in Western Concrete, the Board does not argue that Beck acted as a retailer that incurred sales tax liability by providing the materials used in its customers' construction projects. Indeed, the Board agrees that Beck was a consumer of the construction materials, not a retailer of them, and that Beck therefore incurred no sales tax liability.^[7]

However, as Western Concrete recognized, the Board's regulations specifically establish that a construction contractor is liable for the payment of either use or sales tax with respect to its consumption of construction materials. (Western Concrete, supra, 66 Cal.App.3d at p. 546, fn. 1, citing Cal. Code Regs., tit. 18, § 1521.) Thus, here, as we have discussed, Beck is liable for the payment of use tax as a consumer of the construction materials.^[8]

D. The Assessment of Use Tax Liability on Beck Does Not Offend the Commerce Clause

Citing the Commerce Clause of the United States Constitution, Beck also brings a constitutional challenge to the assessment of use tax liability for the construction materials at issue in this case. As we will explain, Beck's challenge lacks merit.

A tax will offend the Commerce Clause if it "discriminate[s] against interstate commerce." (Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274, 279.) According to Beck, the application of the use tax in this case offends the Commerce Clause because "[t]o impose a use tax on the interstate activity when there is no sales tax in the same intrastate activity places the interstate activity at a disadvantage . . . ." Beck argues, "If there is no sales tax liability on an intrastate transaction involving the use of materials incidental to a service contract then there should be no use tax liability on the same interstate transaction."

This argument fails. If Beck had purchased the construction materials as a consumer from within California, it would have paid sales tax. (§ 6051.)^[9] However, Beck purchased the materials out of state for use in California and was subject to use tax. Because both in-state and out-of-state purchases of the materials would be subject to taxation, there is no discrimination against interstate commerce.

DISPOSITION

The judgment is affirmed.

IRION, J.

WE CONCUR:

McCONNELL, P. J.

AARON, J.

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^[1] Unless otherwise indicated, all further statutory references are to the Revenue and Taxation Code.

^[2] Section 6201 provides: "An excise tax is hereby imposed on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer . . . for storage, use, or other consumption in this state . . . ."

Section 6202 provides in part: "Every person storing, using, or otherwise consuming in this state tangible personal property purchased from a retailer is liable for the tax."

Section 6401 provides: "The storage, use, or other consumption in this state of property, the gross receipts from the sale of which the purchaser establishes to the satisfaction of the board were included in the measure of the sales tax, is exempted from the use tax . . . ."

^[3] Issues often arise as to the correct measure of the use tax. However, neither in its refund claim nor its lawsuit did Beck did challenge the measure of the use tax.

^[4] We note that according to section 6406, a person liable for California use tax is allowed a credit "to the extent that the person has paid a retail sales or use tax, or reimbursement therefor, imposed with respect to that property by any other state, political subdivision thereof, or the District of Columbia prior to the storage, use, or other consumption of that property in this state." Because Beck does not allege that it paid taxes to any other state with respect to the purchase or use of the materials at issue here, this provision is not applicable.

^[5] We accord " 'great weight' " to the Board's regulations because the Board has accumulated a " 'body of experience and informed judgment' in the administration of the business tax law 'to which the courts and litigants may properly resort for guidance.' " (Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 12, 14.) The Board's regulations applicable specifically to construction contractors apply here because Beck meets the definition of a "construction contractor" as used in the Board's regulations. The regulations define a construction contractor as someone who performs a construction contract, expressly including performing "steel work," as Beck performed here. (Cal. Code Regs., tit. 18, § 1521, subd. (a)(2).) Indeed, Beck identified title 18, section 1521, which applies solely to construction contractors, as the relevant regulation in its refund claim.

^[6] If Beck had purchased the materials from a California retailer, it would have been required to pay sales tax on the purchase (§ 6051), but because the purchase was made out of state, the California use tax applies.

^[7] A large portion of Beck's briefing, as well as its refund claim, is devoted to an argument that its provision of construction materials was incidental to its provision of services and therefore no tax is owed on its provision of materials to its customers under the lump sum contracts. However, that argument is beside the point. The Board concedes that no tax was owed on Beck's provision of construction materials under its lump sum construction contracts. Rather, because Beck is a consumer, tax was owed on its original purchase of the construction materials.

^[8] Beck also relies on MCI Airsignal, Inc. v. State Bd. of Equalization (1991) 1 Cal.App.4th 1527. MCI decided that a taxpayer's provision of paging services to its customers, which included the provision of pagers, did not give rise to sales tax liability on the part of the taxpayer for the provision of services, despite the fact that the taxpayer provided equipment (the pagers) along with the paging services. (Id. at p. 1531.) Like Western Concrete, MCI does not apply because it addressed whether the taxpayer incurred sales tax liability by acting as a retailer of paging devices provided incidental to its paging services.

^[9] We note generally that certain exceptions apply to the payment of sales tax for in-state transactions. For instance, sales tax would not be payable if Beck was not a consumer but rather a reseller and had in good faith given the seller a certificate that the materials were purchased for resale. (§ 6091.)