Chula Vista Electric Co. v. State Board of Equalization

Citations: 53 Cal. App. 3d 445; 125 Cal. Rptr. 827; 1975 Cal. App. LEXIS 1577Docket: Civ. 45454

Court: California Court of Appeal; December 3, 1975; California; State Appellate Court

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The case involves Chula Vista Electric Company appealing a judgment related to the application of California's Sales and Use Tax Law concerning electrical transmission cable installed under a contract with the United States. The court clarified that while electrical transmission and distribution lines are not considered tangible personal property for tax purposes, the individual components, including the installed cable, are classified as such. The court ruled that the cable was used in a contract to improve real property within California, making it subject to use tax. 

The plaintiff, an electrical contractor, did not manufacture but purchased the cable, which was installed to replace approximately 1,200 feet of old cable at the North Island Air Station. The installation involved specific voltage capacity and connections to movable property. Although the old cable was salvaged, the new cable was not attached to the conduit but was connected at both ends. The use tax was assessed based on the $90,000 purchase price of the cable, which the taxpayer contested after their refund claim was denied. The trial court upheld the tax assessment, leading to this appeal.

Taxpayer claims that the cable in question is either machinery or equipment exempt from sales tax under Revenue and Taxation Code section 6381, or that it is an electric transmission line not classified as tangible personal property under section 6016.5. The determination of the cable's classification hinges on whether it is considered an improvement to real property. Section 6384 specifies that sales tax applies to tangible personal property sold to contractors for U.S. government projects involving real property improvements. The California Administrative Code distinguishes between "machinery and equipment" and "fixtures," with the latter deemed improvements to real property. Machinery and equipment are defined as items that are not permanently attached or can be removed easily, while fixtures are integrated into the structure and essential for its use.

The electrical transmission line is classified as a structure and, if the cable is essential and firmly attached to it, it qualifies as a fixture. The legal definition of attachment extends beyond physical connection to include adaptation for use and the installer’s intent. Taxpayer bears the burden of proof to demonstrate that the cable is not a fixture. The trial court upheld the tax assessment, citing the taxpayer's inability to prove their claim.

Taxpayer failed to provide evidence regarding the intent of its customer, the United States, concerning the installation of the cable, which is a significant installation adapted for use with real property. Testimony indicated the cable has a lifespan of 20 years and can be salvaged, but this alone does not alter its classification as a fixture. Since the taxpayer did not meet the burden of proof on intent, the trial court's classification of the cable as part of a contract for real property improvement is upheld. The taxpayer's reliance on case law, particularly Honeywell, Inc. v. State Bd. of Equalization and Coast Elevator Co. v. State Bd. of Equalization, is found to be misplaced as those cases pertain to the definition of sales of tangible personal property, not the specific provisions regarding contracts with the United States under Revenue and Taxation Code section 6384. This section aims to maximize the tax base permissible under constitutional limitations regarding state taxation of the federal government and its entities. Furthermore, the taxpayer's argument that the cable is not tangible personal property hinges on the interpretation of "electrical transmission lines" in section 6016.5. Legislative context suggests that this term refers to the entire line, not its individual components. Historically, the State Board of Equalization attempted to impose sales tax on the installation of electrical transmission lines, which led to litigation and subsequent legislative action that defined exclusions for certain types of property, including electrical transmission and distribution lines.

The enactment of the relevant statute was intended to be prospective and did not alter previous laws, reflecting a 'hands off' approach that left uncertainties for judicial interpretation. Previous cases did not challenge the applicability of sales and use tax on the cost of component materials for transmission line construction, focusing instead on the taxation of installation labor. The introduction of Revenue and Taxation Code section 6016.5 coincided with disputes over discriminatory tax treatment faced by transmission line installers. This section aimed to relieve installers from the obligation to include installation labor costs in their tax calculations, ensuring equitable treatment with other contractors improving real property. Section 6016.5 does not exclude the component parts of electrical transmission lines from being classified as tangible personal property. Consequently, the cable installed by the taxpayer, being a component rather than a complete line, was correctly classified as tangible personal property by the board. The judgment was affirmed, with concurrence from both judges. Further appeals, including a Supreme Court petition, were denied. Additionally, new arguments raised by the appellant in their reply brief were not considered due to lack of prior explanation.