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Searles Valley Minerals Operations, Inc. v. State Bd. of Equalization, 160 Cal.App.4th 514, 72 Cal.Rptr.3d 857, 08 Cal. Daily Op. Serv. 2314, 2008 Daily Journal D.A.R. 2854

Facts

The Taxpayers, which include several companies that produce and sell electricity to California consumers, purchased coal from sellers outside California and paid over $5 million in use taxes on these purchases from 1999 to 2002. They later sought refunds from the State Board of Equalization, which denied their claims on the grounds that electricity is not tangible personal property and that the coal was not incorporated into the electricity but was instead a manufacturing aid. After an unsuccessful administrative appeal, the Taxpayers filed a lawsuit in the superior court seeking a refund.

The Taxpayers purchase their coal from sellers outside of California and do not pay any sales taxes on those purchases. They originally paid more than $5 million in use taxes to California on their purchases of the coal between July 1999 and September 2002, but later filed claims for refunds of those taxes with the State Board of Equalization (the Board).

Issue

Whether coal purchased outside California and used to produce electricity in the state is subject to the California use tax.

This case presents the issue of whether coal that is purchased outside California and used by the purchaser to produce electricity in the state is subject to the California use tax.

Rule

Electricity is considered 'tangible personal property' under the Sales and Use Tax Law, but property that is not physically incorporated into a final product is subject to use tax.

The California Sales and Use Tax Law generally imposes a sales tax on a retailer for the privilege of selling tangible personal property at retail and a comparable tax (known as a use tax) on tangible personal property that is purchased from a retailer outside the state but that is thereafter stored, used or consumed by the purchaser within the state.

Analysis

The court determined that while electricity qualifies as tangible personal property, the coal used in its production does not become part of the electricity itself. The coal is consumed in the process of generating electricity, serving as a catalyst rather than being incorporated into the final product. Therefore, the purchase of coal was subject to the California use tax.

As explained below, we conclude that electricity is 'tangible personal property' under the Sales and Use Tax Law, but that the coal is not incorporated into the electricity and thus its purchase is subject to the California use tax.

Conclusion

The court affirmed the judgment of the lower court, concluding that the Taxpayers' purchases of coal were not for resale and were properly subject to California's use tax.

Accordingly, we affirm the judgment.

Who won?

State Board of Equalization; the court ruled in favor of the Board because the coal was not incorporated into the electricity and thus was subject to use tax.

Affirmed.

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