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District Court of Appeal, Third District, California.

UNION OIL COMPANY OF CALIFORNIA, a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Respondent.

Civ. 10382.

Decided: January 29, 1963

Brobeck, Phleger & Harrison, San Francisco, for appellant. Stanley Mosk, Atty. Gen., by Ernest P. Goodman and John J. Klee, Jr., Deputy Attys. Gen., San Francisco, for respondent.

This is a suit for a refund of use tax. It arises out of the sale and subsequent use of two ships, the SS Santa Paula and the SS Lompoc. The two ships were sold by appellant to Cienega Tanker Corporation. The sale took place outside of California and was not subject to California sales tax. The state contended, however, that Cienega incurred California use tax liability on the theory that it purchased the ships outside of California, intending to use them in California and thereafter did so. The state therefore assessed use tax and interest in the sum of $151,800.00 and called upon appellant, Union Oil Company, the vendor of the vessels, to collect the tax and pay it over to the state pursuant to the provisions of sections 6203–6204 of the Revenue and Taxation Code which require a retailer maintaining a place of business in this state (as did Union) to collect any use tax due from those to whom it sells property.

The facts are not in dispute and are contained in a stipulation of record.

Union Oil Company of California is a California corporation engaged in producing, refining, manufacturing, transporting, distributing and marketing petroleum and petroleum products. Its business activities extend throughout the United States and its territories, and into Canada, South America and other foreign countries. In connection with the distribution of its products, Union has for many years operated tank ships for the purpose of transportation to the various areas in which its refining and marketing facilities are located.

Cienega Tanker Corporation is a Delaware Corporation. Its principal office is in the City of Wilmington in that state, and Cienega is not, and never has been qualified to do business in California. It does not do and never has done business therein nor does it have, nor has it ever had, any officers, representatives, agents, employees or other personnel in California.

On March 5, 1953, Union and Cienega entered into a contract of sale at Jersey City, in New Jersey, whereby Union agreed to sell to Cienega five bulk oil tankers, including the SS Santa Paula and the SS Lompoc. Union agreed to deliver each vessel to Cienega at Astoria, in Oregon, or such other port in the United States of America as Cienega should designate. Cienega agreed to pay for the vessels by cashier's or certified check, or checks in New York funds. The purchase price of the SS Santa Paula and the SS Lompoc was $2,200,000 for each vessel.

The contract of sale provided that concurrently with the delivery of each vessel Union and Cienega would execute a bareboat charter party with respect thereto. Pursuant to this stipulation Cienega chartered the SS Santa Paula to Union for a period of 24 months and the SS Lompoc for a period of 48 months with options granted to Union to extend each charter period for 12 months. The terms of each charter party required Union to pay charter hire to Cienega each month in New York funds and this has been done.

The SS Santa Paula was purchased and chartered pursuant to the above-described contract of sale on March 17, 1953. All documents of title, certificates, checks and other papers required for the sale were delivered and all documents necessary for the charter were executed and delivered in Jersey City, New Jersey, on that date. The vessel was delivered by Union to Cienega and redelivered by Cienega to Union in Astoria, Oregon, under charter, on that same date. The purchase and chartering of the SS Lompoc were handled in the same fashion on March 20, 1953. Cienega has never given to Union any directions with respect to the places or areas in which Union should operate the vessels, and by the terms of the charters was without any right or authority to do so. Each of the charters contains the following provision relating to use and operation of the vessels:

‘Charterer shall have the full use of the Vessel and may employ the Vessel in any trade throughout the world, except that the Vessel shall not be operated in any manner contrary to applicable law and shall not carry any cargo that will expose the Vessel to penalty, forfeiture or capture.’

The charters likewise permit Union ‘to subcharter the Vessel to others on a time or voyage basis.’

The stipulated record of use of the two vessels during the year following the sale is as follows:

During the period from March 17, 1953 to March 17, 1954, the year immediately following its sale, the SS Santa Paula was operated by Union outside the California three-mile limit for 145 days, within the three-mile limit for 188 days, and spent 32 days in dry dock.

During the period from March 20, 1953 to March 20, 1954, the year immediately following its sale, the SS Lompoc was operated by Union outside the three-mile limit for 142 days, within the three-mile limit for 198 days, and spent 25 days in dry dock.

The dry docking of the vessels occurred in California.

The Sales and Use Tax Law is found in Part 1 of Division 2 of the Revenue and Taxation Code. The use tax is imposed by section 6201, which 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 on or after July 1, 1935, for storage, use, or other consumption in this State * * *.’

Section 6202 provides, in part, that the primary liability for the tax is upon the purchaser:

‘Every person storing, using, or otherwise consuming in this State tangible personal property purchased from a retailer is liable for the tax. * * *’

‘Storage’ is defined by section 6008:

“Storage' includes any keeping or retention in this State for any purpose except sale in the regular course of business or subsequent use solely outside this State of tangible personal property purchased from a retailer.' ‘Use’ is defined by section 6009 as follows:

“Use' includes the exercise of any right or power over tangible personal property incident to the ownership of that property, except that it does not include the sale of that property in the regular course of business.'

The use tax is imposed upon a person who stores, uses, or otherwise consumes in this state tangible personal property purchased from a retailer for storage, use or other consumption in this state. It is undisputed that Cienega purchased the vessels from Union, a retailer. Therefore two questions are posed, one, did Cienega store, use or otherwise consume the vessels in California, and, two, did Cienega purchase the vessels for the purpose of such storage, use or other consumption? A negative answer to either or both of these questions necessitates reversal.

Contending that Cienega did not use the tangible personal property here involved in California, appellant argues as follows: The tax is imposed on the use of tangible personal property in California; the property in this case consisted of two ships which are things, that is, steel plates, engines, decks, etc.; the law specifically defines tangible personal property as ‘personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses.’ (Rev. & Tax.Code, sec. 6016.) From this premise appellant argues further that Cienega, after the delivery of the vessels to appellant under the charters, not only did not make, but under the charters had no authority or right to make, use of those vessels within the meaning of the word ‘use’ as that word appears in the statutes, saying that ‘use’ means statutorily the physical use of tangible personal property. If the statutory meaning of ‘use’ is so limited, then, as appellant contends, once Cienega had, pursuant to the charters, delivered the vessels physically into the exclusive possession of appellant it neither did nor could during the charter period use the property in California or elsewhere. Any such use of the property thereafter was necessarily and exclusively that of appellant.

Respondent insists that the interpretation of the word ‘use’ cannot properly be limited as appellant would have it to the physical use of tangible personal property. Respondent does not contend that if the interpretation contended for by appellant be adopted, Cienega has made use of the vessels. Respondent argues that the employment of the ships in California for the production of income therefrom was a ‘storage, use, or other consumption’ of the property by Cienega within the meaning of the statutes, regardless of the fact that the owner-lessor remained out of state. Says respondent, the leasing of property is the ‘exercise of a right or power’ over the property ‘incident to the ownership of the property’ (this much is conceded by appellant).

In this controversy over the meaning of the word ‘use’, appellant relies strongly upon Ross v. City of Long Beach, 24 Cal.2d 258, 264, 148 P.2d 649, 652. In that case a private party leased land and buildings to a school district and claimed that since the school district was in possession and was physically using the land and buildings exclusively for school purposes, the private owner was entitled to tax exemption under the Cnstitution. The city contended, as respondent contends here, ‘* * * that there is a further and additional use of said property than that for which the * * * [lessee] uses it, and that is the use by the * * * [lessor] who rents it for the purpose of deriving revenue therefrom.’ This argument that the owning of property and the holding of it for purposes of producing rental income was a use of the property, even though not a physical use thereof was rejected by the Supereme Court. The court distinguished between the ownership of property and the possession and use of it by the district for public school purposes, saying (at p. 265, 148 P.2d at p. 653): ‘[W]e are in accord with the decisions of those courts in other jurisdictions, as well as in our own, which hold that it is the use and not the ownership of the property in the possession of a school district and used by it for public school purposes that determines its status as property exempt from taxation.’ The Supreme Court in Ross was construing Article XIII, section 1, of the Constitution and particularly the exemption from taxation contained therein, granting such exemption as to ‘property used exclusively for public schools.’ The decision is not conclusive here where the interpretation of the use tax law is involved, even though both cases are concerned with the use of property. Nevertheless, the theory of divisible use of property by lessor and lessee was presented in Ross and for the purposes of that case was rejected.

Certainly it is permissible to say that the owner of property leasing it out and delivering it into the exclusive possession of a lessee is making a use of it and this is true whether the property be land or personal property, that is, physical objects. But the sales and use tax are emphatically concerned with taxing the sale, use, storage and consumption of tangible personal property, that is, property which ‘may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses.’ (Rev. & Tax.Code, sec. 6016.)

It is not claimed that in the transactions occurring between appellant and Cienega anything was concealed, or that any secret and undisclosed purposes were effectuated.

Cienega purchased the vessels from appellant. They were delivered into Cienega's possession. This having been done, Cienega chartered them to appellant by bareboat charter and, pursuant thereto and acting without the State of California, delivered them to appellant. Whether thereafter Union used the vessels in California or used them elsewhere, as it did the other three vessels, was neither the concern of Cienega nor in anywise the act of Cienega. Indeed, it did not concern Cienega that appellant should make or not make any use of the vessels. These things appear from and are the result of the charter parties executed between Cienega and appellant. They were ordinary transactions in respect of the operation of such ships upon the high seas. As we read the statutes involved, Cienega did not store or use the vessels in California.

Something more should be said concerning the contention of respondent that there was, at least, a consumption by Cienega of the vessels in this state. In support of this contention respondent argues that the word ‘consumption’ is broad enough to include natural obsolescence and the ordinary wear and tear incident to the physical use of any physical object. But the statute clearly states that the other consumption which is taxed is akin to use and storage of tangible personal property. The principle of ejusdem generis ought to be applied here. We note that the statutes specifically define ‘storage’ and ‘use’ by the purchaser, but no specific definition of ‘other consumption’ is attempted. Whatever the words ‘other consumption’ may include, we are satisfied that they do not include anything done by Cienega to or with the vessels during that part of the charter period with which we are here concerned. Undoubtedly, the use of the vessels by appellant during that period may be said in some manner to have partially consumed the vessels in that all things are consumed by use. But such consumption as may have occurred must be related to, as it flows from, the use by appellant.

For the same reasons it cannot be said that the record here supports a conclusion that Cienega purchased the vessels with the intent to store, use or otherwise consume them in California. From the record the intent of Cienega in the purchase of the vessels was to do with them exactly what was done—bareboat charter the vessels to appellant.

The researches of counsel and of this court have not disclosed any decision of appellate courts that specifically decide the questions here presented, save one. In Trimount Coin Machine Co. v. Johnson (1956), 152 Me. 109, 124 A.2d 753, the Supreme Court of Maine was presented with the questions we have here, under statutes such as ours and under facts not materially different. The Maine taxing authorities argued that where vending machines were newly purchased outside Maine and again outside Maine were leased and by the lessee brought into Maine and used, the lessor must pay a use tax thereon. The Maine court rejected the contention. We quote the pertinent part of that decision:

‘The question, however, is not whether the machine is in use, within the ordinary meaning of the word, in Maine, but whether the petitioner is so using it within the meaning of the statute. The person taxable must be both a user and the purchaser at retail sale. The lessee in Maine is a user but not the purchaser and hence is not taxable. The petitioner is the purchaser. Thus the decision turns on whether there is ‘use’ in Maine by the lessor.

‘In our view of the statute the petitioner is not liable for a use tax. The use and possession of the property in Maine in its entirety is, and at all times has been, in the lessee or customer by virtue of the lease. In the instant case, as we have seen, the lease is bona fide and is not ‘in lieu of purchase’. The rental provided under the lease is therefore true rent for the use of the property.

‘To lease property in ordinary meaning is to obtain the use and possession of property in return for rent. * * *

‘If the petitioner exercises in this State any right or power incident to its ownership of the machine, the use tax is imposed. The tax does not rest upon the sum total of rights and powers incident to ownership, but upon any right or power. There is, of course, no use tax arising under any theory of the Act from the purchase of the machine outside of Maine or from the lease written in Massachusetts. Until the machine reached the State of Maine there was no action whatsoever within the State with respect to the property owned by the petitioner.

‘From the agreed statement it appears that the petitioner has done nothing with respect to the machine within the State of Maine either before or since making the lease. We conclude, therefore, that the petitioner has not exercised in this State any right or power over the property within the statutory definition of ‘use’.'

The judgment is reversed.

VAN DYKE, Justice pro tem.

SCHOTTKY, Acting P. J., and FRIEDMAN, J., concur.

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