The following is from Laura Mahoney at the BNA Daily Tax Report on the Taiheiyo Cement case.
Reproduced with permission from Daily Tax Report, 50 DTR K-5 (Mar. 15, 2012). Copyright 2012 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>
SACRAMENTO, Calif.—California’s enterprise zone tax credit is available for machinery parts if they are capitalized, but not if they are expensed in the same year they are bought and used, a state appellate court said March 13 in upholding earlier rulings from a trial court and state tax administrators Taiheiyo Cement U.S.A. Inc. v. Franchise Tax Board, Cal. Ct. App., No. B226067, 3/13/12.
In a 16-page opinion, a three-judge panel of the Court of Appeal for the Second Appellate District in Los Angeles affirmed a July 2010 ruling from state trial court, and a 2008 ruling from the State Board of Equalization, that Taiheiyo Cement U.S.A. could not claim EZ credits for its machinery parts.
Marty Dakessian, an attorney with Reed Smith in Los Angeles, representing Taiheiyo, March 13 declined to comment on the ruling.
Cement Plant Ran Continually
At issue was $4.9 million in taxes, interest, and penalties paid for tax years 1998 and 1999. Taiheiyo argued before SBOE that because its cement plant ran continuously, parts typically meant to last three years were used within one year. It fought the Franchise Tax Board’s determination that because the parts were bought and used in the same year, and not capitalized over more than one year, the tax credit could not apply to the parts (46 DTR H-3, 3/10/08).
In the opinion, the court said the California Revenue and Taxation Code section that authorizes the credit, which amounts to a credit for sales and use tax paid on the parts, defines “qualified property” with the terms “placed in service” and “basis.” These terms are used generally with respect to capital assets, the court said.
The term “placed in service” marks the beginning of the depreciation period for capital assets, and by using it in the enterprise zone credit law, the Legislature intended the sales and use tax to apply to capital assets, the court said.
“We conclude that the sales and use tax credit of section 23612.2 [of the Revenue and Taxation Code] is not available in connection with the purchase of current expense assets but only in connection with the purchase of capital assets,” the court said. “Thus, taxpayer has failed to show it comes squarely within the statute expressly authorizing the tax credit and is entitled to a refund.”
Taiheiyo Argued Terms Meant Something Else
The court rejected Taiheiyo’s argument that the law does not include an express capitalization requirement or use terms such as “depreciable property” or “property charged to a capital account,” which are used in the Internal Revenue Code. The term “placed in service” is in the state law only as it relates to the amount and timing of the credit, the company argued.
Various uses of the term “placed in service” do not affect the court’s ultimate conclusion about the Legislature’s intention to limit the credit to capitalized assets, the court said.
The court reached similar conclusions on the use of the term “basis.” Taiheiyo argued the term means “cost” in the EZ statute, and its purpose is to prohibit a taxpayer from taking the sales and use tax credit, and later adding the same sales tax to the cost basis of the qualified property and deducting it as a current expense.
“[B]ecause we consider the statute as a whole, taxpayer does not convince us that the Legislature intended to use the term ‘basis’ in connection with current expense assets,” the opinion said.
The appellate court also said the Los Angeles County Superior Court did not err in granting FTB’s motion to rule in its favor on the pleadings without a trial. Further, it said it did not need to address Taiheiyo’s argument that FTB had an “unstated policy of imposing a capitalization requirement for tax credits” that amounted to an illegal, underground regulation.
Presiding Justice Robert M. Mallano authored the opinion, with associate justices Frances Rothschild and Victoria Gerrard Chaney concurring.
By Laura Mahoney