Could a California insurance company use its gross-premiums-tax protection to avoid a retailer's sales-tax reimbursement charge?

Plain-English summary

A retailer sold tangible personal property to a California insurance company and charged sales-tax reimbursement. After a California Supreme Court decision broadened the insurance gross-premiums tax's constitutional “in lieu” protection to all activities of an insurance company, the purchaser claimed an exemption.

Counsel said the court decision did not change this transaction. California Revenue and Taxation Code section 6051 imposed sales tax on the retailer for its retail sale, while Civil Code section 1656.1 allowed the retailer to collect reimbursement from the purchaser by contract.

Because the purchaser was reimbursing the retailer rather than paying a tax legally imposed on the purchaser, the insurance company's in-lieu protection did not apply. The letter therefore supported continuing to charge the reimbursement.

Common questions

Did the Supreme Court decision protect every activity of an insurance company?

The letter said yes as to taxes imposed on the insurance company, but not as to tax legally imposed on a separate retailer.

Does calling the invoice item “sales tax” change who owes the tax?

No. The letter said the retailer remained the taxpayer even when the purchaser paid an itemized reimbursement.

Citations and references

• California Constitution article XIII, section 28(f) (insurance gross-premiums tax's in-lieu protection, as cited)
• California Revenue and Taxation Code section 6051 (sales tax imposed on retailer, as cited)
• California Civil Code section 1656.1 (contractual sales-tax reimbursement, as cited)
• Mutual Life Insurance Co. of New York v. City of Los Angeles (1990) 50 Cal.3d 402 (all insurer activities, as cited)
• Massachusetts Mutual Life Insurance Co. v. City and County of San Francisco (1982) 129 Cal.App.3d 876 (earlier limited approach, as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/135-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/135-0350.pdf

Original ruling text

135.0350

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-5550

June 12, 1990

Ms. L--- W--D--XXX --- ----- ---, CA XXXXX

Re:

SR -- XX-XXXXXX

Dear Ms. W---:
This is in response to your letter dated May 25, 1990. When you sell tangible personal property to a California insurance company, you charge it sales tax reimbursement. Your insurance company purchaser has now claimed an exemption based on a recent court case. Section 28(f) of Article XIII of the California Constitution provides that the gross premiums tax on insurance companies is in lieu of all other taxes, with exceptions not relevant here. In 1982, one court held that this “in lieu” provision applied only when the activity sought to be taxed is reasonably related or incidental to activities traditionally associated with the insurance industry. (Massachusetts Mutual Life Ins. Co. v. County of San Francisco (1982) 129 Cal.App.3d 876 (upholding city tax on activity not traditionally associated with the insurance industry).) The California Supreme Court recently overruled the Massachusetts Mutual case and held that the “in lieu” provision applies to all activities of an insurance company. (Mutual Life Ins. Co. of New York v. City of Los Angeles (1990) 50 Cal.3d 402.) However, this case does not apply to your sales to the California insurance company. A retailer owes sales tax on its retail sales of tangible personal property in California. (Rev. & Tax. Code § 6051.) The retailer may collect sales tax reimbursement with respect to those sales if pursuant to contract. (Civ. Code § 1656.1.) That is, sales tax is a tax on the retailer, not on the purchaser, even if the retailer collects sales tax reimbursement (often itemized as “sales tax”) from the purchaser. Since your insurance company purchaser is not paying a tax when it pays you

Ms. L--- W---

-2-

June 12, 1990
135.0350

sales tax reimbursement, the “in lieu” provisions considered in the cases discussed above do not apply. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Tax Counsel

DHL:wak