California Court of Appeal Holds that Expensed Assets Do Not Qualify for Enterprise Zone Sales and Use Tax Credit
In its recent decision Taiheiyo Cement U.S.A., Inc. v. Franchise Tax Board, 2012 Cal. App. LEXIS 282 (Mar. 13, 2012), the California Court of Appeal for the Second District held that expensed assets do not qualify for the Enterprise Zone Sales and Use Tax (“EZSUT”) credit under California Revenue and Taxation Code section 23612.2 (“Section 23612.2”). The taxpayer, Taiheiyo Cement U.S.A., Inc., is a manufacturer of hydraulic cement with a manufacturing plant in Colton, California. Colton is located within an economically depressed area that has been designated as an “enterprise zone” by the legislature. The EZSUT credit is one of several tax incentives that is available to businesses located within an enterprise zone. The EZSUT provides for a tax credit against California income or franchise tax in an amount equal to the sales or use tax paid on “qualified property.”
Section 23612.2, subdivision (a) provides for a tax credit “for the taxable year [in] an amount equal to the sales or use tax paid or incurred during the taxable year by the taxpayer in connection with the taxpayer’s purchase of qualified property.” “Qualified property” includes “[m]achinery and machinery parts used for fabricating, processing, assembling, and manufacturing.” Cal. Rev. & Tax. Code § 23612.2(b)(2)(A)(i). Section 23612.2 further states that “[t]he total cost of qualified property purchased and placed in service in any taxable year that may be taken into account by any taxpayer for purposes of claiming this credit shall not exceed twenty million dollars ($20,000,000)”; the qualified property must be used by the taxpayer “exclusively in an enterprise zone”; and the qualified property must be “purchased and placed in service before the date the enterprise zone designation expires, is no longer binding, or becomes inoperative.” Cal. Rev. & Tax. Code § 23612.2(b)(2)(B)-(D) (emphasis added).
Taiheiyo Cement claimed the EZSUT credit under Section 23612.2 on the purchase of certain property related to its Colton plant for tax years 1998 and 1999. In 2001, after examining Taiheiyo Cement’s 1998 and 1999 tax returns, the Franchise Tax Board (“FTB”) disallowed the credit for both years. The State Board of Equalization upheld the disallowance of the credits on the ground that “currently expensed assets are not ‘qualified property’.” In response, Taiheiyo Cement brought an action in the Superior Court of Los Angeles, arguing that a plain reading of Section 23612.2 authorized the credit “for all qualified property, whether expensed or depreciated.”
The Court of Appeal disagreed with Taiheiyo Cement’s position. The Court concluded that the EZSUT credit was not available to the taxpayer because “qualified property” relates only to capital (and not expensed) assets. The Court held that Section 23612.2 only authorized the EZSUT for capital assets because the definition of “qualified property” references terms that are generally used with respect to capital assets, e.g. “placed in service” and “basis.” The Court also based its decision on the legislative intent of the EZSUT credit and legislative history which indicated that “qualified property” is the same as Internal Revenue Code § 1245 property (referring to capital assets that must be depreciated).
As a result, the Court of Appeal affirmed the trial court’s decision in favor of the FTB. The Court did not address Taiheiyo Cement’s cause of action for declaratory relief seeking an interpretation of Section 23612.2. Taiheiyo Cement filed a petition for rehearing on March 27, 2012, and the petition was denied by the Court on April 4, 2012.
If you have any questions regarding the contents of this newsletter, please contact the following attorneys in the firm’s State and Local Tax Practice Group.
| Chicago (312) 558-5600 | San Francisco (415) 591-1000 |
| Robert F. Denvir | Charles J. Moll III |
| Alan Lindquist | Troy M. Van Dongen |
| Bradley R. Marsh | |
| Jocelyn M. Wang | |
| Dina Bronshtein Segal | |
| Jasmine I. Tollette |