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McDonnell Douglas Corp. v. Franchise Tax Bd., 26 Cal.App.4th 1789, 33 Cal.Rptr.2d 129

Facts

McDonnell Douglas Corporation (MDC), a Maryland corporation, manufactures commercial and military aircraft and sells them internationally. It owns a facility in Long Beach, California, where it delivers most of its commercial aircraft. MDC paid franchise taxes for the tax years 1973 and 1974 and sought a refund after its requests were denied. The company contested the Board's calculation of taxes, particularly regarding the sales factor for aircraft delivered in California but intended for use out of state.

Plaintiff and appellant McDonnell Douglas Corporation (MDC) is a Maryland corporation which manufactures commercial and military aircraft and aircraft parts. It sells its aircraft to an international market and owns a facility located in Long Beach. The majority of its commercial aircraft are delivered to the customers in Long Beach or at a facility in Yuma, Arizona. The customers then arrange for transportation of the aircraft.

Issue

The main legal issues were whether aircraft delivered in California but manufactured for out-of-state use were subject to franchise tax and whether MDC had sufficient nexus with foreign countries for taxation under California's throwback rule.

The first issue in contention is the determination of whether aircraft which are manufactured for use out of California, but are delivered to the purchaser in California by MDC are included within section 25135, subdivision (a) as property 'delivered or shipped to a purchaser, … within this state.'

Rule

The court applied the destination rule for computing the sales factor, determining that sales of tangible personal property are in California if the property is delivered to a purchaser within the state, regardless of the ultimate destination of the goods.

For purposes of computing the sales factor, section 25135 provides that: 'Sales of tangible personal property are in this state if: [¶] (a) The property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the f.o.b. point or other conditions of the sale; or [¶] (b) The property is shipped from an office, store, warehouse, factory, or other place of storage in this state and (1) the purchaser is the United States government or (2) the taxpayer is not taxable in the state of the purchaser.'

Analysis

The court analyzed the statutory language of Revenue and Taxation Code section 25135, focusing on the phrase 'delivered or shipped to a purchaser … within this state.' It concluded that the emphasis should be on the location of the purchaser rather than the place of delivery, aligning with interpretations from other jurisdictions that have similar statutes. The court found that the Board's interpretation, which included the place of delivery, contradicted the primary purpose of UDITPA to recognize the contribution of consumer states.

While we recognize the administrative regulations and rulings are entitled to great weight, we also recognize that revenue rulings are simply administrative opinions. Moreover, the cases cited by MDC construe statutes identical or substantially similar to section 25135, and thus the cases are not distinguishable.

Conclusion

The court affirmed the trial court's judgment in favor of MDC, ruling that the aircraft delivered in California but intended for out-of-state use were not subject to franchise tax. The court also upheld the denial of MDC's request for attorneys' fees.

The judgment is affirmed.

Who won?

McDonnell Douglas Corporation prevailed in the case because the court agreed with its interpretation of the tax law, ruling that the franchise tax did not apply to aircraft delivered in California for out-of-state use.

MDC, on the other hand, provides us with numerous opinions from various jurisdictions, which reach precisely the opposite result; i.e., that delivery to a purchaser in California is not considered a sale within California if the goods are ultimately destined for use in another state.

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