DECORATIVE CARPETS INC v. STATE BOARD OF EQUALIZATION

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District Court of Appeal, Second District, Division 3, California.

DECORATIVE CARPETS, INC., a corporation, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.*

Civ. 24963.

Decided: October 17, 1961

Stanley Mosk, Atty. Gen., Dan Kaufmann, Asst. Atty. Gen., and Neal J. Gobar, Deputy Atty Gen., for appellant. Loeb & Loeb, John L. Cole and John S. Warren, Los Angeles, for respondent.

This is an appeal from a judgment in favor of Decorative Carpets, Inc., a corporation, in an action for the recovery of sales taxes paid by it to the State Board of Equalization.

The action was brought pursuant to the provisions of section 6933 of the Revenue and Taxation Code under which an action can be brought for the recovery of the whole or any part of the amount with respect to which a claim has been disallowed by the board. In essential facts were embodied in a stipulation, the major portion of which is set forth in the margin of this opinion.1 In addition, the president of the plaintiff corporation testified that, as to the items involved in the action, the plaintiff obtained sales tax reimbursement from 882 customers. The plaintiff had retained invoices which showed the names and addresses of such customers. The defendant was not permitted by the trial court to question the president of the plaintiff corporation as to whether, when reimbursement for sales tax was collected from customers, it was known to the plaintiff that there was no obligation, or only a partial obligation, for sales tax with respect to the particular transactions.

The judgment was entered on April 14, 1961. Thereafter and during the pendency of this appeal the Legislature enacted section 6054.5 of the Revenue and Taxation Code; that section is now effective. The act adding section 6054.5 to the Revenue and Taxation Code (Stats.1961, ch. 872) is set forth in the margin.2

It is clear that the sales tax is not a tax on the buyer but is a tax imposed on the seller for the privilege of selling goods at retail. While the seller may reimburse himself from the buyer for the tax, the buyer has no direct obligation, insofar as the state is concerned, for the payment of the tax. De Aryan v. Akers, 12 Cal.2d 781, 783, 87 P.2d 695; Market St. Ry. Co. v. California State Bd. of Equalization, 137 Cal.App.2d 87, 103, 290 P.2d 20; Livingston Rock & Gravel Co. v. De Salvo, 136 Cal.App.2d 156, 160–161, 288 P.2d 317; General Elec. Co. v. State Bd. of Equalization, 111 Cal.App.2d 180, 185, 244 P.2d 427.

There is a divergence of judicial reasoning as to the right of a person to a refund of a tax of the nature of that involved herein which he has erroneously paid, but for which he has received reimbursement from his customers, when such person seeks such refund for his own use and not for the purpose of repaying his customers. Such divergent views are well expressed in the case of 123 East Fifty-Fourth Street, Inc. v. United States, 2 Cir., 157 F.2d 68. There the taxpayer had sought a refund of excise taxes paid by it under the erroneous assumption that its restaurant was a cabaret within the meaning of the taxing statute. The claim was rejected because the claimant had not borne the burden of the taxes since it had collected the taxes from its partrons (the tax being separately designated on each of the checks presented to the patrons) and had not refunded them. That position was held to be erroneous in the majority opinion written by Circuit Judge Chase and in which Circuit Judge Swan concurred. Judge Chase said, at pages 69–70: ‘It is true that a suit to recover taxes paid is like an action for money had and received and the plaintiff must show that the government has money which belongs to him. [Citation.] * * * We may take it for granted that the patrons of the plaintiff paid more than they would have been charged had the plaintiff not supposed that it was liable for the taxes. Yet what the plaintiff saw fit to charge became the price of that which it furnished its patrons and when paid that price became the plaintiff's money. [Citation.] Though the patrons paid an item designated tax they did not become the taxpayers. No taxes were imposed upon them by law and the plaintiff could not levy taxes. It could and did make charges the sum of which fixed the price a patron paid and if the latter did not like the price charged he was free the refrain from patronizing the establishment. However the charges were labeled in the checks presented, no taxes as such were collected by the plaintiff for the government, [citations], for which the plaintiff was bound to account. If overcharges were mistakenly made its patrons they may have had an action against the plaintiff but only a debtorcreditor relationship was created and the actual money the plaintiff received when the checks were paid became its own to use as it pleased.’ See also United States v. Jefferson Electric Mfg. Co., 291 U.S. 386, 401, 54 S.Ct. 443, 78 L.Ed. 859; Builders' Club of Chicago v. United States, 14 F.Supp. 1020, 1022, 83 Ct.Cl. 556; Independent Linen Service Co. v. Stone, 192 Miss. 832, 6 So.2d 110, 112–113.

The contrary view was expressed in the dissenting opinion in 123 East Fifty-Fourth Street, Inc. v. United States, supra, 157 F.2d 68, wherein Circuit Judge Learned Hand said, at pages 70–71: ‘On the other hand, all refunds are based upon the theory of unjust enrichment, as laid down by Lord Mansfield in Moses v. Macferlan, 2 Burr. 1005; and, although the defendant has no positive statutory sanction for its defence, the plaintiff on its part has no standing to claim the refund, unless it can show that it is inequitable for the defendant to keep the money. * * * [I]f the plaintiff collected the money under what the guests must have understood to be a statement that it was obliged to pay it as a tax, and that it meant to do so, the money was charged with a constructive trust certainly so long as it remained in the plaintiff's hands * * *. When the plaintiff, having taken the money charged with the constructive trust, paid it to the collector, a claim against the collector and the defendant at once arose in its favor, based upon the collector's unlawful exaction * * *. If the plaintiff collects this claim, it will therefore hold it as trustee for its guests. That, I agree, would be no answer, if there was any possibility that the plaintiff would, or indeed could, distribute it to its guests; the defendant could not keep the money merely because it feared that the plaintiff would be truant to its duty. But it is plain that the plaintiff will not be able so to distribute the recovery, however much it may wish; * * * and the plaintiff should be required to prove that it can and will distribute it. That being so, the situation as it comes to us is the familiar one, in which the equities are equal and legal title should prevail.’ See also Standard Oil Co. v. Bollinger, 337 Ill. 353, 169 N.E. 236; Richardson Lubricating Co. v. Kinney, 337 Ill. 122, 168 N.E. 886.

The statutory law as it existed at the time the judgment was rendered in the present case did not expressly preclude a refund, otherwise proper, because the taxpaying retailer did not intend to pass the refund on to his customers who had actually borne the burden of the tax in the sense that they had reimbursed the retailer therefor. Aside from the effect of the intervening legislation, a subject to be hereinafter discussed, in the absence of such limitation, which the Legislature could have readily expressed if intended, the judgment of the court below appears to have been well-founded. Cf. United States v. Jefferson Electric Mfg. Co., supra, 291 U.S. 386, 401, 54 S.Ct. 443, 78 L.Ed. 859; Builders' Club of Chicago v. United States, supra, 14 F.Supp. 1020, 1022, 83 Ct.Cl. 556.

We turn, then, to a consideration of the effect of section 6054.5 of the Revenue and Taxation Code, enacted since the entry of the judgment herein. ‘There is some conflict of opinion as to whether a case should be determined according to the law in effect when the judgment was rendered in the lower court, or according to the law in effect at the time the cause is disposed of by the reviewing court, but both reason and the weight of authority point to the view that the case must be determined in the light of the law as it exists at the time of the decision by the appellate court, where the statute changing the law is intended to be retroactive and apply to pending litigation, or is retroactive in its effect; and this is true though it may result in the reversal of a judgment which was correct at the time it was rendered by the trial court. The general rule is, of course, subject to limitation where rights have been acquired which may not be divested by legislative changes in the law.’ 3 Am.Jur., Appeal and Error, § 1157; see also Hughes v. Illinois Pub. Aid Comm., 2 Ill.2d 374, 118 N.E.2d 14, 43 A.L.R.2d 1421; Annotation, 111 A.L.R. 1317. In International Ass'n of Cleaning and Dye House Workers v. Landowitz, 20 Cal.2d 418, at page 423, 126 P.2d 609, at page 611, the Supreme Court said: ‘It is true that ordinarily an appellate court will review the action of the trial court as of the time when it was rendered, but where matters of which the court has judicial knowledge occur subsequent to the trial court's action and have the effect of destroying the basis for the plaintiff's cause of action, it has been held that the appellate court may dispose of the case upon those grounds.’ See also People v. Bank of San Luis Obispo, 159 Cal. 65, 79–80, 112 P. 866, 37 L.R.A., N.S., 934; First Nat. Bank of San Luis Obispo v. Henderson, 101 Cal. 307, 309–311, 35 P. 899. In Western Hardwood Lumber Co. v. California Employment Comm., 58 Cal.App.2d 403, at page 411, 137 P.2d 76, at page 80, the court said: ‘It is the law that a reviewing court must dispose of a case under the law in force when its decision is rendered * * *.’

The Supreme Court has had occassion to discuss the effect of changes in the statutory law relating to the refund of moneys paid as taxes. In Southern Service Co., Ltd. v. County of Los Angeles, 15 Cal.2d 1, 97 P.2d 963, the plaintiff commenced an action under section 3804 of the Political Code to recover taxes alleged to have been illegally collected pursuant to an excessive tax rate adopted by the board of supervisors for the tax year 1933–1934. The plaintiff obtained a judgment as to certain items. Subsequent legislation limited the basis for such refund. In the course of its opinion, the court said at page 7 of 15 Cal.2d, at page 967 of 97 P.2d: ‘It is the settled law of this state that illegal taxes voluntarily paid may not be recovered by the taxpayer in the absence of a statute permitting a refund thereof; and in the absence of such statute only illegal taxes paid under duress, coercion or compulsion are considered to have been involuntarily paid and therefore recoverable.’ At pages 11–12 of 15 Cal.2d, at page 969 of 97 P.2d, the court further stated: ‘The foregoing discussion and review leads to the conclusion that the plaintiff possessed no right or remedy pursuant to section 3804 of the Political Code which existed apart from the statute itself and which the legislature could not cut off by repeal. The general relationship of sovereign and taxpayer is not founded on nor does it create any contractual rights. [Citations.] A right to a credit or refund of taxes is purely statutory. [Citations.] The legislature may withdraw such a statutory right or remedy, and a repeal of such a statute without a saving clause will terminate all pending actions based thereon * * *. In the case before us, therefore, the legislature was acting within its constitutional powers when it withdrew the right to a refund of such illegal taxes and cut off the remedy by action including all pending actions, saving only the common-law right to a refund of taxes involuntarily paid.’ In support of its conclusion, the Supreme Court cited People ex rel. Eitel v. Lindheimer, 371 Ill. 367, 21 N.E.2d 318, 124 A.L.R. 1472. In People v. Union Oil Co., 48 Cal.2d 476, at page 481, 310 P.2d 409, at page 412, the Supreme Court quoted from the Southern Service Co., Ltd., case and said: ‘Since under this reasoning there is no vested right to the refund of the taxes but rather such action is a matter of legislative grace, it necessarily follows that the right to the payment of interest on such refunds is not vested and the Legislature may enact a statute cutting off such right theretofore accorded the taxpayer.’ Similar determinations have been made in other jurisdictions. United States v. Jefferson Electric Mfg. Co., supra, 291 U.S. 386, 401–402, 54 S.Ct. 443, 78 L.Ed. 859; People ex rel. Sterling Lumber & Supply Co. v. Workman, 385 Ill. 18, 52 N.E.2d 259, 260–261.

In the present case, it does not appear that the payments made by the taxpayer were not voluntarily made. It is clear that under the authorities cited its right to a refund could be abrogated or modified. The questions remaining for determination are whether the intervening legislation was intended to be applied to pending claims and whether, in any event, such legislation by its terms has any impact upon the case here presented.

In United States v. Jefferson Electric Mfg. Co., supra, 291 U.S. 386, 54 S.Ct. 443, 446, 78 L.Ed. 859, the legislation limiting a refund of the tax therein involved was enacted on May 29, 1928, but expressly excepted from its effect was a refund ‘[p]ursuant to a judgment of the court in an action duly begun prior to April 30, 1928.’ In the legislation before the court in Southern Service Co., Ltd. v. County of Los Angeles, supra, 15 Cal.2d 1, 97 P.2d 963, 967, the intent that there should be a retroactive effect was clearly expressed in the following language: ‘No refund shall be made * * * nor shall any action be hereafter commenced nor shall any action heretofore commenced be further prosecuted * * *.’ The Supreme Court stated (15 Cal.2d at page 13, 97 P.2d at page 970): ‘The legislature, no doubt having in mind the holding of this court in Krause v. Rarity, 210 Cal. 644, 654, 655, 293 P. 62, 77 A.L.R. 1327, expressly provided that the withdrawal of the right to refund in the particular class of illegal taxes specified should terminate all pending actions. Its expression in this respect is sufficient to accomplish the declared intent and purpose.’ In the case to which reference was made, Krause v. Rarity, Mr. Justice Shenk said, 210 Cal. at pages 655–656, 293 P. at page 66: ‘The case, then, falls within the operation of the rule contended for by the plaintiff, namely, that although the legislature has the power to give a statute retrospective operation, if it does not impair the obligation of contracts or disturb vested rights, yet it is to be presumed that no statute is intended to have that effect, and it will not be given that effect, unless such intention clearly appear from the language of the statute. * * * We find nothing in section 141 3/4 which would justify, much less compel, the conclusion that said section was intended to be retrospective. In such case the new law would have no effect on litigation pending at the time it was enacted.’ See also Fountain v. State Board of Education, 157 Cal.App.2d 463, 469, 320 P.2d 899. The amendment before the court in People v. Union Oil Co., supra, 48 Cal.2d 476, 310 P.2d 409, consisted of a change with respect to the kind of mistake which would be the basis for allowing interest upon an overpayment of tax. The court stated the problem before it to be (48 Cal.2d at pages 479–480, 310 P.2d at page 411): ‘Thus, the principal question for determination is whether the 1947 amendment opperated from its effective date to prevent the running of interest thereafter on defendant's overpayments made prior thereto.’ (Emphasis added.)

When the problem is considered in the light of the authorities which have been discussed, there appears to be no sound basis for a conclusion that it was the intention of the Legislature that the provisions of section 6054.5 of the Revenue and Taxation Code should apply to claims for refund made before its effective date. Not only do its specific provisions support the determination that the section was not intended to have such retroactive effect, but they show that, in any event, the present case does not fall within the scope thereof. In the first place, a new obligation to make payment to the state under certain circumstances is created. But the amount received under the guise of reimbursement for taxes, with knowledge of the impropriety of the computation, becomes such an obligation due from the recipient only when the recipient fails or refuses to return the amount to the customer after the Board of Equalization or the customer has notified him that such excess has been ascertained. No contention is made in this appeal that such a notification and failure or refusal ever existed in this case. Moreover, the new legislation provides that such obligation ‘may be determined and collected by the board’ and that the ‘amount so collected’ shall be refunded ‘only upon submission of proof * * * that such amount has been returned or will be returned to the customer.’ In the present case, there is no ‘amount so collected.’

While, if inquiry had not been limited in the trial court, the present case might have been shown to be of the nature which section 6054.5 is intended to discourage, this court cannot construe the new enactment as being operative with respect to past matters when it clearly appears to be intended to be applicable only to future events. ‘Such a pretended construction would not be construction at all but would be legislation. Courts have no power to legislate.’ People v. Pacific Guano Co., 55 Cal.App.2d 845, at page 848, 132 P.2d 254, at page 256.

The judgment is affirmed.

FOOTNOTES

1.  ‘Plaintiff is engaged in the carpet business and commenced doing business on or about April 1, 1955. On or about this date it applied for and received a seller's permit from the State Board of Equalization. Among it activities plaintiff sold carpeting and auxiliary materials at retail and in addition furnished and installed carpeting wall-to-wall on the premises of its customers. As to the carpeting which was sold at retail without installation, there is no dispute between the plaintiff and the defendant. There is a dispute, however, arising out of the activities of the plaintiff in fulfilling contracts for the installation of wall-to-wall carpeting. ‘In each of its contracts for furnishing and installation of wall-to-wall carpeting plaintiff specifically provided for sales tax reimbursement to itself from the person with whom the contract had been executed by separately setting out sales tax in each invoice. In about 60% of the contracts plaintiff computed sales tax reimbursement on the total amount charged the customer for carpeting, other materials and labor. In about 40% of the cases the plaintiff computed sales tax reimbursement on the amount charged for the carpeting, and the charge for labor was excluded from the computation of tax reimbursement. In such cases the labor charge was sometimes separately stated and sometimes included in the ‘installation’ charge along with the amounts for padding, tackless strip and other materials. Plaintiff remitted to defendant all of the sales tax reimbursement which it collected from its customers. ‘It is now stipulated and agreed that plaintiff, under Ruling 11 of the State Board of Equalization, was a consumer and not a retailer of the carpeting and other materials used in fulfilling the wall-to-wall contracts. Thus plaintiff, having consumed property purchased under resale certificates, became liable under the provisions of Section 6094 for a tax measured by the purchase price which it paid for such carpeting and materials. ‘Plaintiff is now seeking a refund of the difference between the tax on the cost to plaintiff of the carpeting and other materials used in the performance of such contracts and the sales tax reimbursement in fact collected from customers as a result of such contracts. Plaintiff is not seeking this refund as a trustee for the customers from whom it had over-collected sales tax reimbursement but intends to retain any proceeds obtained from this litigation for its own use. ‘For the period of April 1, 1955 to March 31, 1958 Plaintiff reported and paid to the defendant as sales tax liability under the California Sales and Use Tax Law, the sum of $18,270.67. It is now sipulated between the parties that $13,933.22 was properly paid to the defendant and that if the plaintiff is entitled to any refund at all, it would be entitled to a refund of $4,337.45 plus interest as provided by law.’

2.  ‘The people of the State of California do enact as follows: ‘Section 1. Section 6054.5 is added to the Revenue and Taxation Code, to read: ‘6054.5 When an amount represented by a person to a customer as constituting reimbursement for taxes due under this part is computed upon an amount that is not taxable or is in excess of the taxable amount and is actually paid by the customer to the person, the amount so paid shall be returned by the person to the customer upon notification by the Board of Equalization or by the customer that such excess had been ascertained. In the event of his failure or refusal to do so, the amount so paid, if knowingly computed by the person upon an amount that is not taxable or is in excess of the taxable amount, shall constitute an obligation due from him to this State. Such obligation may be determined and collected by the board in accordance with Chapters 5 and 6 of this part. The amount so collected shall be refunded by the board to the person in accordance with Chapter 7 of this part, only upon submission of proof to the satisfaction of the board, or in the event the board denies his claim for refund, to the satisfaction of the superior court, that such amount has been returned or will be returned to the customer. ‘The foregoing shall not apply to an amount computed by using a schedule designed to result in reimbursement in an amount as nearly equivalent as practicable to the tax applicable to total taxable sales and to the average amount of individual taxable sales. ‘Sec. 2. Whereas it appears to the satisfaction of the Legislature that persons are collecting money from the public under the representation that they are entitled to collect such amounts by way of reimbursement under the Sales and Use Tax Law, when in fact no tax reimbursement or a lesser tax reimbursement is authorized by law, and whereas such conduct is an improper use of the provisions of the Sales and Use Tax Law which allows retailers to reimburse themselves from the customers for sales and use taxes actually due the State. ‘Now, therefore, it is the intent of this legislation to discourage such a practice by preventing persons from profiting from such erroneous collection of tax reimbursement authorized by this part. It is further the intent of the Legislature that nothing in this legislation shall be construed to affect the basic principle that the incidence of the California sales tax is on the retailer.’

FORD, Justice.

SHINN, P. J., and VALLEÉ, J., concur.