INTERNATIONAL BUSINESS MACHINES v. STATE BOARD OF EQUALIZATION (1979)

This is an action for refund of taxes. The action was brought pursuant to Revenue & Taxation Code section 6933. Plaintiff International Business Machines (hereinafter, IBM), a New York corporation, sought the refund from defendant State Board of Equalization of the State of California (hereinafter, the Board). Trial was by the court on the basis of stipulated facts. In addition, the Board presented the testimony of one witness. Judgment was awarded to plaintiff in the sum of $735,106.27.¹ Defendant Board appeals; we affirm the judgment.

We state first the factual background of this dispute. Plaintiff IBM sells and leases data-processing equipment in California. Prior to August 1, 1965, IBM had leased various items of equipment to banks and insurance companies in this state pursuant to a standardized written agreement, and these leases were in effect on August 1, 1965.

Prior to August 1, 1965, such leases of personal property were not considered “sales” within the meaning of that term as employed in the Revenue & Taxation Code, with an exception not relevant here. With respect to IBM's leases, IBM, the lessor and also the manufacturer of the leased item, paid a tax measured only by the cost of the parts and materials used to manufacture the items to be leased, and thereafter paid no tax on the subsequent lease of the property and receipt of rental charges.

In 1965, the California Legislature was exploring the possibility of raising substantial additional revenue by taxation to meet the ever-increasing demands of the state budget. One of the changes contemplated by the lawmakers concerned the lease of data-processing equipment, which had, it was contended, escaped appropriate taxation in California. Payment by the manufacturer-lessor of taxes on the raw materials of business machines yielded far less than would a tax on continuing rental receipts.

On June 30, 1965, the California Legislature passed Assembly Bill No. 1 of the 1965 First Extraordinary Session, effective August 1, 1965, which included a number of topics but will be referred to herein as the 1965 Lease Tax Law. Generally, the 1965 Lease Tax Law imposed a new tax, a tax on the lessee a use tax on the lessee's use of the leased property. Certain lessees among them banks, insurance companies and the federal government were exempt from the tax on lessees and, in those cases, the new law imposed the tax on the lessor. When the lessor was the manufacturer, as was IBM, the measure of the tax was the rental receipts from the property while leased in California rather than on the basis of the cost of raw materials.

Prior to passage of this new legislation, there was legislative discussion and dispute concerning the necessity for exempting from its application certain existing leases of property upon which the raw materials tax had already been paid. On June 29, 1965, the Assembly had refused to concur with the Senate on the exemption question. Hence, the matter was considered on June 30, 1965, by a Conference Committee composed of three assemblymen and three senators in an effort to reach agreement on the scope of the proposed exemption. Defendant Board's legal counsel, Charles H. Otterman, was present at this meeting. The effort to draft an amendment acceptable to a majority of the Assembly was made in an atmosphere of extreme pressure and haste, as the various amendments to Assembly Bill No. 1 were to be considered by the entire Legislature later that day. The Conference Committee delegated to Otterman and others the task of fashioning, over the lunch hour, an acceptable “grandfather clause” for existing leases. What emerged was section 6006.3(b), which was included in the 1965 Lease Tax Law as it passed the Legislature later in the day.

In final form, section 6006.3(b) of the Revenue & Taxation Code read: “(b) ‘Lease’ includes Only an original lease or a renewal of an original lease entered into or executed after the operative date of this section. This provision does not exempt any person from the payment of any tax required to be paid pursuant to this part in accordance with the provisions of this part as they read on July 1, 1965.” (emphasis added.)

On July 1, 1965, after passage of this section, the Legislative Counsel of the Legislature indicated that “(t)he tax on leases would apply only to leases executed on and after August 1, 1965.”²

At the same time that section 6006.3(b) was passed, the Legislature also enacted section 6391, an exemption applicable to the sales tax, which provided as follows: “There are exempted from the computation of the amount of the sales tax the rentals payable under a lease of tangible personal property for any period of time for which the lessor is unconditionally obligated to lease the property for an amount fixed by the lease prior to the operative date of this section and the lessor did not elect under Sections 6094 or 6244 to pay use tax measured by the amount of the rental charge.” Thus, the exemption fashioned with respect to the sales tax was more narrowly drawn than section 6006.3(b), with respect to the use tax.³

Section 6006.3(b), which generated the instant litigation, was shortlived; it was deleted from the Revenue & Taxation Code during the 1967 regular session of the Legislature when Assembly Bill No. 2388 was enacted after various amendments. Section 6407 replaced it, including the “unconditional obligation” aspect of section 6391 and now applying it to the use tax. Section 6407⁴ read: “The possession of, or the exercise of any right or power over, tangible personal property under a lease of such property is exempt from the use tax for any period of time for which the lessee is obligated to lease the property for an amount fixed by the lease prior to August 1, 1965. The lessee shall be deemed not to be obligated for any period of time for which he has the unconditional right to terminate the lease upon notice, whether or not the right is exercised.”

It should be noted that, as originally drafted, section 6407 was described as a “clarification” of existing law rather than as a substantive change in the law, although it was passed without reference to the section's purpose. At any rate, the parties herein are in agreement that, since its passage, IBM leases are only exempt from the use tax to the extent that they were (1) executed before August 1, 1965, and (2) unconditionally obligated the lessee.

It may be seen that the dispute over section 6006.3(b) is a narrow one in the sense that it is limited to the period of November 1, 1965, through March 31, 1967, and concerns its application to bank and insurance company customers of IBM.

In order to delineate the issues involved, it is necessary to set forth with some particularity the various stages of relationship between IBM and these lessees as of August 1, 1965, the effective date of section 6006.3(b).

The standardized lease in use by IBM at that time contained the following clause with respect to the term of the agreement: “This Agreement is effective from the date it is accepted and shall remain in force, except as otherwise provided, for one year from the date the first machine is installed ready for use, and may be terminated by either party then, provided written notice is received three months prior, otherwise this Agreement shall remain in full force and effect. Thereafter it may be terminated or any of the machines may be discontinued by either party at the end of any calendar month provided three months' prior written notice is received.”

The lease also included the following provision concerning charges: “All charges are subject to change upon three months' notice. If the monthly availability charge is changed for any machine, the Customer may discontinue it or terminate this Agreement on the effective date of such change; otherwise, the new charge shall become effective.”

It was undisputed by the parties that, subsequent to August 1, 1965, IBM had, on at least one occasion, imposed a general increase in charges upon its customers.

The lease also contained the following provision for additions or replacements of equipment: “Machines, in addition to the above or to replace any the Customer may have in use, will be furnished, if available, to the Customer under this Agreement, at the schedule of charges in effect on the date such machines are installed ready for use.”

The only time a customer signed the standardized lease was at the commencement of the business relationship with IBM; all additional orders and adjustments were processed pursuant to the original agreement as set forth above.

As of August 1, 1965, there were a substantial number of customers in possession of IBM data processing equipment pursuant to leases executed prior to that date. In addition, IBM had a substantial amount of “backlog,” i. e., orders received from customers which were being processed but had not as yet reached installation stage; there was often considerable delay.

So-called “Category 1” orders were those where the lease had been executed before August 1, 1965, but the machines had not yet been installed. “Category 2” referred to orders of equipment by existing customers under the provisions of existing leases relative to additional or replacement machines. Existing customers sometimes had requested either Type changes, requiring substitution of equipment, or Model changes, which could often be effectuated by adjustment in the field. These field changes were referred to by IBM as Miscellaneous Equipment Specification, i. e., MES changes. “Category 3” orders were orders which had been placed with IBM but which were subject to some condition or contingency.

Defendant Board adopted an extremely narrow interpretation of section 6006.3(b), which appeared to exempt all leases Except “an original lease or a renewal of an original lease entered into or executed (after August 1, 1965).”

The Board took the position that the section exempted only those leases executed on or before August 1, 1965, Which could not be terminated by the parties, i. e., where the parties were “locked into” the lease. Pursuant to this interpretation, leases in existence on August 1, 1965, which provided for termination by either party, were not exempt from the time such termination was possible, whether or not it occurred. In essence the Board was applying the “unconditional obligation” criterion set forth in section 6391 which was applicable to the sales tax, on the assumption that the legislative intent in enacting section 6006.3(b) as to the use tax was similar to that which had produced section 6391, reflecting legislative concern that only those parties operating under existing leases which could not be changed were to have the benefit of the exemption. This view was particularly directed, it appears, at IBM's standardized lease, a document sufficiently flexible to effectuate changes in the relationship of the parties without the necessity of executing a new contract.

If an IBM customer had the right, pursuant to the contractual terms, to terminate the lease by notice to IBM after August 1, 1965, the Board contended that failure to give such notice constituted a taxable “renewal” of the lease. Further, the Board maintained that if a customer under an existing lease ordered either a type or MES change in equipment after August 1, 1965, that, too, altered the original contract sufficiently to give rise to tax liability. Finally, the Board regarded conditional orders placed with IBM prior to August 1, 1965, as orders which had not as yet created any binding contractual relationship; if the orders were in fact filled after that date, the leases then executed were entirely taxable under the new law.

Plaintiff IBM disagreed with the Board, but paid the taxes required pursuant to Board interpretation. IBM filed a timely claim for refund for the November 1, 1965 to March 31, 1967 period. The claim was denied by the Board, and this suit was commenced.

The trial court, in awarding judgment to plaintiff, held that section 6006.3(b) was clear as written, and not “ambiguous” as the Board claimed: the section exempted All leases in existence on August 1, 1965, as well as the renewals of those leases; conversely, the exemption did not apply to leases executed after that date or to renewals of such leases.

The trial court relied heavily on the fact that the companion section, section 6391, had been drafted in accordance with the interpretation sought by the Board for section 6006.3(b), but the Legislature had not seen fit to employ the same language when it drafted the latter section. The court reasoned that it was not an accident that the Legislature had failed to employ identical, or substantially similar language, and thus an entirely different result must have been intended.⁵

The trial court also rejected the concept that increases in rental charges pursuant to leases in existence on August 1, 1965, resulted in the creation of new contracts subject to tax. Nor did orders for additional equipment pursuant to existing leases, received before August 1, 1965, give rise to a new taxable contractual relationship.

The trial court determined that conditional orders, however, even though received by IBM prior to August 1, 1965, were not existing obligations as of that date, and, if filled after that date, did result in taxability under the new law. Where a customer under an existing lease obtained a model change after August 1, 1965, the only amount taxable was any additional rental changes occasioned by the change. If a customer under an existing lease ordered and received a type change after August 1, 1965, which involved the substitution of a piece of equipment, the new tax was applicable to the continuing lease in its entirety.

We now consider the contentions of the Board on this appeal, contentions similar to those advanced by it below. Our principal task is the proper interpretation of section 6006.3(b), which imposed new tax liability on certain leases and not on others. We conduct an independent review of the trial court's judgment, for the decision below was arrived at on the basis of undisputed evidence, the joint factual stipulations of the parties. (Southern California Edison Co. v. State Board of Equalization (1972) 7 Cal.3d 652, 659, fn. 8, 102 Cal.Rptr. 766, 498 P.2d 1014.)

We consider first the specific language of section 6006.3(b), declaring that the new tax was to apply to “only an original lease or a renewal of an original lease” executed after August 1, 1965. The Board argues that the Legislature intended to tax Pre-August 1, 1965 leases when they were subject to termination. The Board also insists that the Legislature intended to tax renewals of Pre-August 1, 1965 leases which took place after that date. In making these assertions, the Board assumes that the language of the section is not clear, and invites the application of the various canons of statutory construction available to assist courts in determining the meaning of the statute in question.

Webster's Third New International Dictionary tells us that “ original” refers to “the source or cause from which something arises.” We conclude that when the Legislature described the new tax as applicable to “only original leases” (executed after August 1, 1965) they meant to limit application to leases which Arose after that date.

We note that the word “original” was used twice in the section considered here. The Board asks us to accept the premise that, even if the term “original lease” referred to a “new” lease, renewal of “original leases” referred to renewal of Pre-existing leases, i. e., that the two uses of the term “original lease” were intended to have entirely different meanings. However, we must reject this interpretative theory as a rather strained interpretation. We agree with the trial court that the legislative expression was clear conveying a plain meaning to tax leases executed after the effective date of the statute and to Their renewals. “It is axiomatic that in the interpretation of a statute where the language is clear, its plain meaning should be followed.” (Great Lakes Properties, Inc. v. City of El Segundo (1977) 19 Cal.3d 152, 155, 137 Cal.Rptr. 154, 156, 561 P.2d 244, 246.) “When statutory language is thus clear and unambiguous there is no need for construction, and courts should not indulge in it. (Citation.)” (Solberg v. Superior Court (1977) 19 Cal.3d 182, 198, 137 Cal.Rptr. 460, 470, 561 P.2d 1148, 1158.)

“ ‘One who contends that a provision of an act must not be applied according to the natural or customary purport of its language must show either that some other section of the act expands or restricts its meaning, that the provision itself is repugnant to the general purview of the act, or that the act considered in pari materia with other acts, or with the legislative history of the subject matter, imports a different meaning.’ (Citation.)” (Great Lakes, supra, 19 Cal.3d 152, at pp. 155-156, 137 Cal.Rptr. 154, at p. 156, 561 P.2d at p. 246.)

Defendant Board has failed to persuade us that the legislative intent reflected in section 6391, and applicable to the sales tax, i. e., providing exemption only to those lessors who were unconditionally obligated to perform pursuant to existing leases, was the same in enacting section 6006.3(b). The two sections deal with different taxes and, as the trial court so cogently pointed out, it would have been very easy for the drafters of the use tax section to simply adopt the language of section 6391, which had survived complete revision of the bill in which it first appeared. Nothing definitive appears in the historical note following section 6391, to suggest that it was intended to “expand or restrict” section 6006.3(b). Nor is the fact that, in 1967, when this section was repealed, the Legislature enacted a replacement which adopted the Board interpretation, conclusive in determining legislative intent in 1965.

It is evident from the record before us that the Conference Committee meeting was necessitated not by unanimity but by the divergent views held by members of both legislative bodies on the extent of exemption to be allowed to manufacturer-lessors such as IBM. While the 1967 repeal could be regarded as the rectification of drafting error, it is as reasonable to assume that divergence was gradually replaced by consensus.

The Board characterizes A.B. 1 as a revenue-raising measure; we agree. It is also argued by the Board, but less persuasively, that the measure intended to close tax “loop holes,” one of which had heretofore favored manufacturer-lessors such as plaintiff. The legislative history suggests only that there was some concern for both lessors and lessees who had, prior to August 1, 1965, contracted on the basis, among other factors, of the amount of future taxation. How and to what degree exemption was to be effectuated lies in that grey area of legislative give and take. The final product, section 6006.3(b), whether wise or not, cannot be said to be “repugnant” because of general legislative intent to expand taxation.

The only thing that emerges from the legislative history of A.B. 1, and from the hasty last-minute resolution in 1965 of the exemption question, is that the resolution accepted by the Legislature failed to take into account, perhaps, the fact that IBM leases were drafted in such a fashion that they could conceivably remain operative, and the receipts not subject to tax, long after August 1, 1965. It is elementary that courts must refrain from a distortion of ordinary language or from adding specific meaning to a statute already clear even when the officials who administer it desire such action by a court. Here, we note that the Legislative Counsel apparently entertained no doubt that the statute completely exempted all pre-August 1, 1965 leases.

As was stated in Sanchez v. Unemployment Ins. Appeals Board (1977) 20 Cal.3d 55, 67, 141 Cal.Rptr. 146, 154, 569 P.2d 740, 748, “(w)hile the construction of a statute by the officials charged with its administration is entitled to great weight (citation), . .. ‘final responsibility for the interpretation of the law rests with the courts.’ ”

Defendant Board has also presented argument before us concerning the proper legal meaning to be attached to the word “renewal” as used in the statute and as understood by IBM and its customers. In view of our holding that section 6006.3(b) excluded all post renewals of pre-August 1, 1965 leases, it is unnecessary for us to reach the issue of defining “renewal” in any context here, except to affirm the trial court's determinations in this regard, from which IBM has not appealed.

Defendant Board also contends that the trial court committed error when it struck the testimony of Charles H. Otterman, tax counsel for defendant Board. Otterman, as previously indicated, was called to the stand by the defendant, to relate what had transpired at the Conference Committee meeting attended by legislators prior to the drafting of section 6006.3(b). The purpose of the testimony was to illuminate legislative intent as it was expressed at the meeting; the proceedings were unreported by official transcription.

The Board relies on Rich v. State Board of Optometry (1965) 235 Cal.App.2d 591, 603, 45 Cal.Rptr. 512, 519, which weighed the admissibility of the testimony of a legislator with respect to legislative intent in enacting a statute. The court stated that “(i)t is established that in interpreting a statute a court may properly rely on extrinsic aids such as the history of the statute, committee reports, the legislative debates, and statements to the voters on initiative and referendum measures. (Citation.) However, the testimony of an individual legislator as to his intention, or motive, or opinion with regard to a particular piece of legislation is inadmissible. (Citations.) (Rather than an expression of opinion) we are satisfied that (legislator) Mulford's testimony (constituted) a reiteration of the discussion and events which transpired in the Assembly Committee hearing . . . .” The Rich court, drawing the line between the subjective state of mind of an individual legislator and his objective report of legislative events, held that the testimony was admissible. Rich was cited with approval in In re Marriage of Bouquet (1976) 16 Cal.3d 583, 128 Cal.Rptr. 427, 546 P.2d 1371, in which the California Supreme Court discussed the admissibility of a “letter of legislative intent” published in the legislative journal, written by the author of a particular statute. The letter was deemed admissible because it shed some light upon legislative debates. “Debates surrounding the enactment of a bill may illuminate its interpretation.” (Marriage of Bouquet, supra, 16 Cal.3d 583, 590, 128 Cal.Rptr. 427, 431, 546 P.2d 1371, 1375.)

Otterman testified that, at the Committee meeting, instructions were given by the members to him and others as a drafting team to the effect that legislation was to be drafted to prevent the Use Tax from applying to leases already in existence as of the time the law would take effect, but that no instructions were given as to any particular language to be employed. Otterman further testified that, after section 6006.3(b) was drafted, he did not hear any discussion by the Committee regarding whether or not the language employed in section 6006.3(b) conformed to the instructions given to the drafting team.

We hold that the court erred in striking Otterman's testimony since it was admissible within the principles of Rich and Bouquet in that it tended to set forth the substance of debates and discussions surrounding the enactment of the legislation to be interpreted. The Otterman testimony did not violate the principle that “(i)n construing a statute we do not consider the motives or understandings of individual legislators who cast their votes in favor of it.” (Marriage of Bouquet, supra, 16 Cal.3d 583, 589, 128 Cal.Rptr. 427, 430, 546 P.2d 1371, 1374.) Furthermore, the fact that Otterman testified to what legislators said rather than a legislator himself so testifying is of no moment. The content of legislative debates and discussions may be established by various means formal records of such debates, written committee reports, testimony of legislators, or testimony of persons who were present and heard such debates and discussions.

But the error in striking Otterman's testimony was harmless. The drafting instructions testified to by Otterman were not such as to indicate that the Committee desired legislation drafted that would have the interpretative effect which the Board contends for section 6006.3(b). In addition, to hold evidence of legislative intent admissible “is not to hold that it necessarily concludes that issue. In many cases the indicia of intent are in conflict, and the proper construction of the statute requires us to impute weight to expressions of intent in accord with their probative value. Thus, a motion to print a letter of legislative intent commands less respect than a formal resolution of legislative intent. Likewise, an individual legislator's recount of the argument preceding the passage of a bill probably merits less weight than extensive committee reports on the bill or a formal record of the legislative debates.” (Marriage of Bouquet, supra, 16 Cal.3d 583, 590-591, 128 Cal.Rptr. 427, 431, 546 P.2d 1371, 1375.) The probative value of Otterman's testimony was minimal and does not at all indicate that the statute involved should be interpreted in accordance with the contention of the defendant Board.

The judgment is affirmed.

FOOTNOTES

1.  No portion of this sum is to be retained by IBM, but is to be returned to IBM customers, either directly or through IBM, as these customers actually paid the tax imposed by the Board. (See Rev. & Tax.Code, s 6054.5.)

2.  This was part of a letter to Senator McAteer which was published in the Senate Journal, designated as exhibit G in the record herein.

3.  Generally, the sales tax is imposed on retailers for the privilege of selling tangible personal property (section 6051) while the use tax is an excise tax imposed on the consumption of tangible personal property in the state which has been purchased from any retailer (section 6201). All references herein to code sections are to the Revenue & Taxation Code.

4.  Added by Stats.1967, ch. 832, s 3, p. 2257.

5.  The trial court had admitted the testimony of Charles H. Otterman, tax counsel for the Board, who gave an account of the Conference Committee meeting of legislators who had delegated the drafting of section 6006.3(b). Otterman's testimony was admitted subject to plaintiff's motion to strike; it was later stricken by the court. The court declared that even if the testimony had not been stricken it would not have altered the judgment rendered.

JEFFERSON, Associate Justice.

KINGSLEY, Acting P. J., and ALARCON, J., concur.