ONTARIO COMMUNITY FOUNDATION INC v. STATE BOARD OF EQUALIZATION (1982)

State Board of Equalization (Board) appeals from a judgment ordering it to refund sales tax erroneously assessed against Ontario Community Foundation, Inc. (Ontario) and National Medical Convalescent Hospital of San Diego, Inc. (National).

ISSUE ON APPEAL

Were the respective sales by Ontario and National of their hospital equipment “occasional sales” exempt from California sales tax under Revenue and Taxation Code section 6367 ¹ or were the sales taxable under the “unitary businesses” concept set forth in California Administrative Code, title 18, section 1595, subdivision (a)(3) (hereafter referred to as “regulation 1595(a)(3)”)?

FACTS

The cause was submitted to the trial court on a stipulation of facts.   No testimony was received.   Respondents Ontario and National each operated an acute care general hospital.   Contained within each of their respective hospitals was a food service facility that sold meals to patients, as well as nonpatients, a supply department that sold miscellaneous personal items, and a pharmacy that sold drugs and medicines only to hospital patients with prescriptions.   Each respondent had the required seller's permit needed to conduct these activities.

In 1977, Ontario and National sold their respective hospitals.   The purchase price included all of the real property, furnishings, machinery and equipment used in the operation of the hospitals.   Neither Ontario nor National reported the sale of its tangible personal property as a taxable transaction for California sales tax purposes.

The Board subsequently determined that a sales tax deficiency of $17,827.20 as to Ontario and $15,853.80 as to National existed on the transfer of all hospital tangible personal property.   Ontario and National each paid the sales tax assessed against it together with interest thereon.   Their claims for refund of the taxes assessed against them were denied.   The Board found that the sales by Ontario and National of their respective hospitals were “not ․ occasional sale[s]” and “that under the unitary business concept of regulation 1595, tax applies to the selling price of all fixtures and equipment transferred.”

Ontario and National each filed a “Complaint to Recover Sales Taxes Erroneously Assessed” in the superior court.   These actions were consolidated.

Ontario conceded “that $1,147.20 (six percent of kitchen and dietary equipment, valued at $19,120) and $229.14 (six percent of out-of-state supplies purchased extax for use, purchase price of $3,819) was properly assessed against it.”   National conceded “that $264.30 (six percent of kitchen and dietary equipment valued at $4,405) was properly assessed against it.”   Hence, the amount of tax in controversy at the time of trial was $16,450.86 plus interest as to Ontario and $15,589.50 plus interest as to National.

The trial judge sitting without a jury entered judgment in favor of Ontario and National, ordering the Board to refund the disputed taxes and interest that Ontario and National had paid together with the interest on the amounts refunded.

It is from this judgment that the Board has appealed.

DISCUSSION

Appellant Board contends that the sales of hospital equipment by respondents Ontario and National were subject to California sales tax under the “unitary businesses” concept enunciated by the Board ² in regulation 1595(a)(3) which provides:

“(3) Unitary Business.  ‘Activity for which a seller's permit is required’, for the purpose of distinguishing permit requiring activities from non-permit requiring endeavors, embraces a unitary business operated by an individual, copartnership, corporation or other person as a single enterprise with each part integrated with, dependent upon, or contributory to the operations of the taxpayer as a whole even though some parts of the business operation, if considered without regard to the associated permit requiring operations, would not in themselves be regarded as an activity requiring the holding of a permit.

“The following factors are considered to be good indicia of a single unitary business;  and the presence of any of these factors creates a strong presumption that the activities of the taxpayer constitute such a business:

“(A) Same type of business:  A taxpayer is generally engaged in a unitary business when all of its activities are in the same general line.

“(B) Steps in a vertical process:  A taxpayer is almost always engaged in a unitary business when its various divisions are engaged in different steps in a large, vertically structured enterprise.

“(C) Centralized service units:  A taxpayer which might otherwise be considered as engaged in more than one business is properly considered as engaged in one unitary business when there are centralized departments for such functions as financing, advertising, research, and purchasing.

“(D) Same location:  A taxpayer is almost always engaged in a unitary business when its various divisions conduct business from the same location.

“Examples of unitary business enterprises are as follows:

“(E) A manufacturing plant, research center for developing products to be manufactured at the plant, and a retail outlet for the products.

“(F) A hotel and a restaurant at the same location which caters to guests of the hotel as well as the general public.

“(G) A mortuary and chapel with caskets being sold in connection with the overall operation.

“(H) A service station at which gasoline and other products are sold and lubrication and repair services are performed.

“(I) A combination meat market and grocery store at which taxable items as well as exempt food products are sold.

“(J) A printing plant which produces and sells taxable items as well as exempt periodicals.

“(K) A service station at which car wash services are performed.

“All tangible personal property held or used in each activity or unitary business described above is held or used in an activity requiring the holding of a seller's permit.   If, however, the average monthly receipts from sales of tangible personal property of a kind the retail sale of which is subject to tax are nominal, only the tangible personal property directly used in making those sales shall be regarded as having been held or used in an activity for which a seller's permit is required.   To be considered nominal, average monthly receipts from such sales must not exceed $100 or 1 percent of the average monthly receipts from the entire activity or business, whichever is less.   The above computation shall be based on the receipts for 12 calendar months immediately preceding the sale of the property held or used in the activity or business, or, if the activity or business began less than 12 calendar months before such sale, then for such lesser period.

“The unitary business test set forth in this regulation shall be applied to sales occurring under contracts entered into on or after July 1, 1975.”

Respondents challenge the validity of regulation 1595(a)(3) contending that it was not based on any amendment to sections 6006.5 and 6367 and that it, therefore, lacks statutory support.

Section 6006.5, subdivision (a) defines “occasional sale” to include “[a] sale of property not held or used by a seller in the course of activities for which he is required to hold a seller's permit or permits or would be required to hold a seller's permit or permits if the activities were conducted in this state, provided such sale is not one of a series of sales sufficient in number, scope and character to constitute an activity for which he is required to hold a seller's permit or would be required to hold a seller's permit if the activity were conducted in this state;  ․”

Section 6367 exempts the gross receipts from occasional sales of tangible personal property from sales tax liability.

The Board contends that subdivision (a)(3) was added to conform regulation 1595 to the opinion in Hotel Del Coronado Corp. v. State Board of Equalization (1971) 15 Cal.App.3d 612, 92 Cal.Rptr. 456.

In Hotel Del Coronado, supra, plaintiff purchased a hotel and applied for a seller's permit for the hotel.   Plaintiff undertook to remodel the hotel.   Property taken out of the hotel (furniture, plumbing fixtures, light fixtures, drapes, rugs and miscellaneous items) was sold by a salvage department established by plaintiff.   The property was stored in the hotel or on land adjacent thereto.   The employees running the salvage department were also involved with plaintiff's other operations.

Plaintiff also ran a restaurant, bar, and smoke shop, and rented rooms and furnished services to hotel patrons.   The operations of each department of the hotel including the salvage department were itemized separately in the corporate books.   Between the period of August 1962 and March 1963, at least 12 retail salvage sales were made by plaintiff.

In October 1963, plaintiff sold its entire interest in the hotel to a California corporation.   The property sold included hotel fixtures, furniture and equipment and restaurant equipment and supplies.   Subsequent to the sale, the Board audited plaintiff's corporate records and determined that a deficiency in sales tax plus interest was due.

At trial the sole issue was whether plaintiff's sale of hotel fixtures, equipment and furniture to the buyer was an occasional sale within the meaning of section 6006.5.   The court concluded that the sale was not an occasional sale and that it was, therefore, subject to sales tax.   The appellate court affirmed the trial court's judgment, concluding that the sale by plaintiff of the tangible personal property at issue was not an occasional sale under section 6006.5 because (1) the property sold was held by the seller in the course of an activity for which he was required to have a seller's permit and that (2) the sale in question was one of a series of sales of capital assets sufficient in number, scope and character to constitute an activity for which a seller's permit is required.

In the case at bench, the Board contends that the unitary business provision of regulation 1595 was added to ensure that the regulation was in conformity with the Hotel Del Coronado case.   A review of that case shows that the court's decision does not reflect the unitary business concept set forth in regulation 1595(a)(3).

While the factors listed by the Board in subdivision (a)(3) of the regulation “to be good indicia of a single unitary business” existed in the Hotel Del Coronado case, there is nothing in the opinion to indicate that the court relied on the existence of these factors in holding that the sale was not an occasional one.   The Hotel Del Coronado court did not establish new law;  it simply applied section 6006.5 defining occasional sales according to its plain meaning.

 We conclude that regulation 1595(a)(3) is invalid because it abridges the right afforded a taxpayer under section 6367 to a tax exemption for an occasional sale.  (See Am. Distilling Co. v. St. Bd. of Equalization (1942) 55 Cal.App.2d 799, 805, 131 P.2d 609 and Market St. Ry. Co. v. Cal. St. Bd. of Equal. (1955) 137 Cal.App.2d 87, 102, 290 P.2d 20.)

 The hospital equipment sold by respondents was used in conducting medical and nursing services.   At no time was the equipment directly or indirectly used by Ontario or National in the course of activities for which they were required to hold a seller's permit.   Nor was the sale of hospital equipment one in a series of sales of hospital equipment sufficient in number, scope and character to constitute an activity for which a seller's permit is required.

While we recognize that a corporation may not escape such taxation by merely departmentalizing its business to “set up for tax purposes a distinction between the types or kinds of sales made by it where the effect would be to cause some of its sales to escape the tax aimed at all of such sales” (N.W. Pac. R.R. v. St. Bd. of Equalization (1943) 21 Cal.2d 524, 529, 133 P.2d 400), we also recognize that it is impermissible for the Board to lump all sales together in such a fashion that a corporation is deprived of an exemption to which it is otherwise legally entitled.

The sales by Ontario and National of their respective hospital equipment qualified as occasional sales under section 6006.5 the proceeds of which are exempt from sales tax.³

The judgment is affirmed.

FOOTNOTES

1.   All statutory references herein are to the Revenue and Taxation Code.

2.   Regulation 1595 was promulgated by the Board pursuant to the power delegated to it by the Legislature.   Section 7051 provides:  “The board shall enforce the provisions of this part and may prescribe, adopt, and enforce rules and regulations relating to the administration and enforcement of [sales tax laws]․”

3.   We need not, and do not, determine the applicability of regulation 1595, subdivision (d), as doing so is unnecessary to our decision.

McCLOSKY, Associate Justice.

WOODS, P.J., and KINGSLEY, J., concur.