First American Title Insurance Co. v. Cal. Dept. of Tax and Fee Admin.
Annotate this CaseThe primary issue in this case was whether imposing sales tax on in-state lessors of business equipment to a title insurer violated Article XIII, section 28(f) of the California Constitution. The California Department of Tax and Fee Administration (Department) contended it did not because the lessor, not the title insurer/lessee, was the taxpayer. In the Department’s view, whether the lessee reimburses the lessor for its sales tax obligation was strictly a matter of contract and did not implicate the constitutional limit on taxing insurers. Conversely, First American Title Insurance Company (First American) pointed out that in equipment leases not involving an insurer, the state assesses a use tax, not a sales tax. But where, as here, the lessee is constitutionally exempt from paying use tax, Regulation 1660(c)(1) solved that problem by providing that the sales tax applied instead. First American argued that as a result, Regulation 1660(c)(1) imposed a de facto use tax on title insurers in violation of Article XIII, section 28(f). The trial court agreed with First American and ordered the Department to “remove, strike out and otherwise give no force or effect to that portion of Regulation 1660(c)” providing that when the lessee is not subject to use tax, the sales tax applies. The Court of Appeal reversed: “Article XIII, section 28(f) does not prohibit a sales tax whose legal incidence is on a lessor, even though the economic burden of the tax is ultimately borne by the title insurer/lessee.”
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