KAISER STEEL CORPORATION v. STATE BOARD OF EQUALIZATION (1978)

Plaintiff Kaiser Steel Corporation (Kaiser) appeals from a judgment denying it refund of sales and use taxes paid by it. We reverse the judgment.

The facts are stipulated. We quote from the trial court's findings of fact which incorporate that stipulation:

“1. Plaintiff, Kaiser Steel Corporation, a Nevada corporation (Kaiser), filed this action against defendant, State Board of Equalization (Board), for the refund of certain sales and use taxes paid for the period October 1, 1967 through December 31, 1973.

“2. Kaiser is engaged in the manufacture and production for sale of steel, pig iron and certain other products. The following materials were purchased and used by Kaiser to charge the furnaces which it used in its manufacturing process: limestone, burnt lime, fluorspar, raw dolomite, burnt dolomite, bentonite, aluminum bar and shot, gravel, and aluminum magnesium alloy (materials). During the manufacturing process, the materials are simultaneously used to charge the furnaces and to remove the impurities from the molten metal by combining with them to form a product known as slag.

“3. Aluminum bar and shot aids in the manufacture of steel by removing oxygen from the molten steel. Forty percent of it is incorporated into the finished product giving the steel a fine grained quality, while the remaining sixty percent is incorporated into the slag. Eighty percent of the aluminum magnesium alloy remains in the finished steel product, while twenty percent is dissipated during the manufacturing process with none of it ending up in the slag. A portion of each of the remaining materials is dissipated during the manufacturing process, while an additional portion becomes an ingredient of the slag. The portion of the materials which becomes an ingredient or component of the slag ranges from 52% To 97%.

“4. Since 1967 Kaiser has sold substantially all of its slag to International Mill Service (I.M.S.), a company wholly separate from and independent of Kaiser, for one cent per ton plus a royalty of 10% Of the net sales price received by I.M.S. for the slag which it sells f.o.b. its plant. Kaiser credits the one cent per ton purchase price against the 10% Royalty. I.M.S. removes the slag to its facilities adjacent to Kaiser's plant and there processes it and prepares it for resale.

“5. The slag processed and sold by I.M.S. is used in a wide variety of businesses and for a number of differing purposes.

“6. In a typical year, 1971, Kaiser paid $3,805,557 for the materials, produced 2,485,438 tons of finished steel resulting in sales of approximately $255,000,000, and produced 1,242,719 tons of slag for which it received $98,994 in royalties from I.M.S. The value to Kaiser in having the slag removed from its premises was $233,000, and the combination of the royalty and the removal amounted to 8.7% Of the cost of the materials.

“7. At the time of its purchase of the materials. Kaiser either paid sales tax reimbursement to its vendors or furnished the vendors with a resale certificate and thereafter paid a use tax to the Board.

“8. Upon auditing Kaiser's sales and use tax returns, the Board accepted Kaiser's claim that ‘a portion of the aluminum bar and shot is purchased to incorporate it into steel according to customer specifications' and thus determined that the forty percent incorporated into the finished steel was nontaxable as a purchase for resale. The remaining sixty percent was found to be taxable as an aid in manufacturing the steel as were all of the other materials which eventually ended up in the slag.

“9. Kaiser filed claims for refund with the Board for the sales and use taxes paid with respect to the materials incorporated into the slag, alleging that the materials had been purchased for the purpose of resale. Only those portions of those materials which became components of the slag are in issue in this litigation.”

In short, Kaiser contends that the sales and use taxes herein involved should be apportioned, with Kaiser paying taxes on the portion of the materials purchased by it which are used up in the manufacturing process, but not on the portion of those materials which end up as part of the slag sold by it.

In support of its contention, Kaiser relies on the language of section 6007 of the Revenue and Taxation Code and on Regulation 1525 which interprets that section. Those provisions read as follows, in pertinent part:

Section 6007: “A ‘retail sale’ or ‘sale at retail’ means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property.”

Regulation 1525:

“(a) Tax applies to the sale of tangible personal property to persons who purchase it for the purpose of use in manufacturing, producing or processing tangible personal property and not for the purpose of physically incorporating it into the manufactured article to be sold. Examples of such property are machinery, tools, furniture, office equipment, and chemicals used as catalysts or otherwise to produce a chemical or physical reaction such as the production of heat or the removal of impurities.

“(b) Tax does not apply to sales of tangible personal property to persons who purchase it for the purpose of incorporating it into the manufactured article to be sold, as, for example, any raw material becoming an ingredient or component part of the manufactured article.

“Effective August 1, 1933. Adopted as of January 1, 1945, as a restatement of previous rulings.”

In addition, Kaiser relies, as analogies, on Regulations 1530 and 1531, which read as follows:

Regulation 1530: “Tax applies to 55 percent of the receipts from the sale of coke to foundries for use in the manufacture of castings by the cupola process, which percentage represents that portion of the coke that is consumed in the process. Tax does not apply to the remaining 45 per cent, which percentage represents that portion of the coke that is purchased by the foundries for resale.

“Effective August 1, 1933. Adopted as of January 1, 1945, as a restatement of previous rulings.”

Regulation 1531: “Tax does not apply to sales of dyestuffs and the following chemicals to fur dressers and dyers engaged in processing and dyeing skins and furs of which they are the owners and which they will sell:

“(a) Chemicals used in the pickling and tanning process:

“(b) Chemicals used in mordanting:

“(c) Dyes:

“(d) Intermediates:

I

It is admitted that there are no California cases interpreting section 6007 and Regulation 1525 as applied to the problem before us. Kaiser has cited cases from other states which, it contends, supports its position here.¹ We regard the variations in the statutes of those other states as being sufficiently material to affect their persuasiveness in the case at bench.

We agree with Kaiser that the cases relied on by the Board are not helpful in deciding the case before us. In Kirk v. Johnson (1940) 37 Cal.App.2d 224, 99 P.2d 279, dairy cows were purchased for their use as producers of milk. After they were no longer profitably usable for that purpose, the cows were sold for beef. The court held that the original purchase was taxable in full. However, in that case, the resale of the cows was collateral matter and it was logical to say that the cows were not, originally, purchased for any resale value.

In the so-called “ice” cases,² the purchase of ice to refrigerate perishable products was merely a part of the grower's process of sale and delivery; no part of the ice went into the ultimate product sold. These cases have no factual similarity to the case at bench.

II

As we understand it, the Board's theory is that, in order to escape taxation, the goods must have been purchased for the “primary” purpose of ultimate resale and that there can be no such “primary” purpose where a significant part of the goods are used up in the manufacturing process. It argues that to permit apportionment in this case would permit a manufacturer to escape taxation by a fictitious sale of a minute part of its purchases. The case at bench does not fall within that hypothetical case. Here, Kaiser has, for all of the years in question, been under contract to sell what the record shows is a substantial part of the goods, in the form of slag, to an independent buyer who uses the slag, in substantial amount, as part of its extensive business as a dealer in slag. While it is true that Kaiser recovers, by the sale of slag, only 8.7 percent of the original cost, the revenue produced by that sale amounted to over $300,000 per year.

We conclude, contrary to the view of the trial court, that Kaiser purchases the materials herein involved for a double purpose partly for use in the manufacture of steel and partly for resale as part of the slag produced in its operations. The materials are used by Kaiser simultaneously for the double purpose of producing steel and slag. The operation cannot be factually distinguished from the operations covered by Regulations 1530 and 1531. In Regulation 1531, the Board has distinguished, and apportioned, the tax between materials which are used up in the process of dressing and dyeing furs such as part of the sodium chloride and part of the hydrogen peroxide used as a bleach and the part which becomes an integral part of the finished furs. So here, Kaiser is liable (as it admits) for tax on the portion of the materials which are used up in the manufacturing process; it should not be liable for a tax on the portion of the materials which it sells as slag. That is the exact differentiation that the Board did permit with the aluminum bars and shot.

The judgment is reversed.

I would affirm the judgment. Section 6007 of the Revenue and Taxation Code makes taxable “a sale for any purpose other than resale . . . .” Kaiser bought the materials in question for the purpose of using them in manufacturing steel. Under the purpose test, the saleability of the slag is immaterial. (See Kirk v. Johnson (1940) 37 Cal.App.2d 224, 228, 99 P.2d 279.)

FOOTNOTES

FOOTNOTE.  FN* “Sodium chloride is also used in ‘fleshing,’ i. e., the process of removing the residue of the flesh from the skin, in which case it does not become a component part of the finished product. In the event that a fur dyer purchases under resale certificates sodium chloride, a portion of which he uses in fleshing he will be required to pay sales tax on the cost of the total amount purchased, unless he keeps accurate records showing the respective amounts used in each process.”

FOOTNOTE.  FN** “Hydrogen peroxide is also commonly used as a bleaching agent, in which case the person so using it as the consumer thereof, and the same comments are applicable to it as have been made above in connection with sodium chloride.”

1.  Columbia Quarry Co. v. Dept. of Revenue (1968) 40 Ill.2d 47, 237 N.E.2d 525; State v. U. S. Steel Corp. (1968) 281 Ala. 553, 206 So.2d 358.

2.  People v. Monterey County Ice & Dev. Co. (1938) 29 Cal.App.2d 421, 84 P.2d 1069; People v. Puritan Ice Co. (1944) 24 Cal.2d 645, 151 P.2d 1; Good Humor Co. v. State Bd. of Equalization (1957) 152 Cal.App.2d 873, 313 P.2d 640.

KINGSLEY, Associate Justice.

JEFFERSON, J., concurs.