Opposition — M. G. R. S., Inc. v. California State Board of Equalization

FILED

AUG2 71980

MICHAEL RODAK, JR.,

No. 80-140

IN THE

Supreme Court of the United States

October Term, 1980

M.G.R.S., INC.,

Petitioner,

VS.

STATE BOARD OF EQUALIZATION OF THE STATE OF CALI-

FORNIA,

Respondent.

RESPONDENT’S OPPOSING BRIEF.

GEORGE DEUKMEIJIAN,

Attorney General,

ARTHUR C. DE GOEDE,

Assistant Attorney General,

EDMOND B. MAMER,

PHILIP C. GRIFFIN,

LAWRENCE K. KEETHE,

JEFFREY M. VESELY,

Deputy Attorneys General,

3580 Wilshire Boulevard,

Los Angeles, Calif. 90010,

(213) 736-2555,

Attorneys for Respondent.

Parker & Son, Inc., Law Printers, Los Angeles. Phone 724-6622

i

No. 80-140

IN THE

Supreme Court of the United States

October Term, 1980

M.G.R.S., INC.,

Petitioner,

vs.

STATE BOARD OF EQUALIZATION OF THE STATE OF CALI-

FORNIA,

Respondent.

RESPONDENT’S OPPOSING BRIEF.

Questions as Presented by Petitioner.

1. Can California deny that this transportation between

two points in California but traversing 20 miles of high seas

outside California is ‘‘interstate or foreign commerce,’ in

the face of this Court’s holding to the contrary in Lord v.

Steamship Company and subsequent cases?

2. Can California extend its boundaries beyond both the

federal and state boundaries established by this Court in

United States v. California, so as to define this transpor-

tation as not being ‘‘interstate or foreign commerce?’’

3. Can California deny that this vessel, which carries

prepaid passengers from other states and foreign countries,

is engaged in ‘‘interstate or foreign commerce’’ as defined

by this Court in The Daniel Ball merely because these pas-

sengers constitute a minority of passengers on a minority

of voyages?

TABLE OF CONTENTS

Page

Question as Presented by Petitioner ............... i

NN orn. 5 ck epee vars os ade Ne ens 3

Ps EAU adore eka ga th ies ae beh) aes 5

The California Court of Appeal Correctly Concluded

That Petitioner Did Not Sustain Its Burden of Prov-

ing That It Qualified for the Exemption ........ 5

A. No Federal Question Is Presented by This Peti-

SE Rca ae eek bees hha REE CAVA RO 5

B. Uniformity of Decisions Has Been Maintained

oe Be. 8. eee 6

1. The Effect of the Weeren Case ....... 6

2. The Court of Appeal Opinion Is Consis-

tent With the Union Oil Case — the Only

Other Case Analyzing the Tax Exemption

Statutes in Question ..........e.008. 9

3. No California, Federal or United States

Supreme Court Case Has Been Cited by

Petitioner Which Defines the Specific Ac-

tivity of Petitioner to Be Interstate or

UL. ere rerr Tree ere 13

C. The Specific Activity of Petitioner at the Place

Where It Occurred Has Not Been Declared

Interstate or Foreign Commerce by Any State

a ee ee ee 15

D. The Board’s Longstanding Administrative In-

terpretation of Sections 6368 and 6368.1 Is

Consistent With the Court of Appeal’s Deci-

sion Herein and Is Entitled to Great Weight

When Being Judicially Reviewed ......... 17

nN ee arias withers utuula Mele 2 atts Se 21

iil

Page

Appendix. Opinion of the Court of Appeal...App. p. 1

a. errr rr ere 12

Exhibit A. Notice of Determination, Dated March 4,

1971.

Exhibit B. Netice of Determination, Dated December

28, 1973.

iV

TABLE OF AUTHORITIES

Cases Page

Action Trailer Sales, Inc. v. State Board of Equalization

a OR 8 19, 20

American Distilling Co. v. State Board of Equalization

rr 18

Carmona v. Division of Industrial Safety (1975) 13 Cal.

I ee 19, 20

Coast Elevator Co. v. State Bd. of Equalization (1975)

MOE, obec ve ckccntesenesscseves 10

Coca-Cola Co. v. State Bd. of Equalization (1945) 25

er 19, 20

Complete Auto Transit, Inc. v. Brady (1977) 430 U.S.

274, 97S. Ct. 76, 51 L. Ed. 2d 326 ............. l

Cornell Steamboat Co. v. U.S. (1943) 321 U.S. 634, 64

|) 14, 15

Culligan Water Conditioning v. State Board of Equaliza-

ee ee OD yy soc ceresecees 18, 19, 20

Great Western Financial Corp. v. Franchise Tax Board

EE Decree eve crcessevecvores 20

Henry’s Restaurants of Pomona, Inc. v. State Board of

Equalization (1973) 30 Cal. App. 3d 1009........ 19

Hospital Service of California v. City of Oakland (1972)

NE 10

Hotel Del Coronado Corp. v. State Board of Equalization

8 |) A 10

International Business Machines v. State Board of Equal.

ee 9

Japan Line Ltd., et al. v. County of Los Angeles (1979)

441 U.S. 434, 99 S. Ct. 1813, 60 L. Ed. 2d 336... 1

Lehigh Valley R. Co. v. Commonwealth of Pennsyl-

vania (1891) 145 U.S. 192, 12 S. Ct. 806, 36 L. Ed.

Page

Lord v. Goodall, etc. (1880) 102 U.S. 541, 26 L. Ed.

PEL 1 ties Odio o oa on Veet haan 13, 14

Merrill v. Department of Motor Vehicles (1969) 71 Cal.

BT, a oie head ne oie 8 ins A ae 20

Mission Pak Co. v. State Bd. of Equalization (1972) 23

a Ce. SNe i oe ebawe ex ceus brave watene ee 19

Moorman Mfg. Co. v. Bair (1977) 437 U.S. 267, 98 S.

A. eG ee eee es es cb ew beac oes l

People v. Weeren (1980) 26 Cal. 3d 654..2,6, 7,8, 9

Pitts v. Perluss (1962) 58 Cal. 2d 824 ............. 19

Rible v. Hughes (1944) 24 Cal. 2d 437 ............. 19

Rivera v. City of Fresno (1971) 6 Cal. 3d 132 ...... 20

Santa Fe Transp. v. State Board of Equal. (1959) 51 Cal.

Mh an ols 3 se beh ba ee ee 10

Select Base Materials, Inc. v. Bd. of Equalization (1959)

EY I 6 belo ne 4k 60 9 be BO ce eae 19

Skiriotes v. Florida (1941) 313 U.S. 69, 61 S. Ct. 924,

Ee: BO oc eis eee Deicke 7

Standard Oil Co. v. State Board of Equalization (1974)

CA eS OS OF er re rs wr ree rer 10

Swift and Company v. U.S. (1904) 196 U.S. 375, 25S.

Re OR ere ee per 15

Union Oil Co. v. State Board of Equalization (1963) 60

Se MD > Was 2s coke Cake hk Se ea ee 2, 10, 13

United States v. California (1947) 332 U.S. 19, 67S. Ct.

Ss NE Man i a yd hide vb aha eae enes een 15

United States v. California (1965) 381 U.S. 139, 85 S.

Ch, Se: Oe ks Be BR i ee cs ees

Western Contracting Corp. v. State Board of Equaliza-

tion (1974) 39 Cal. App. 3d 341................ 10

Wilmington T. Co. v. Railroad Commission (1913) 166

A UE 0d 5.6 85g CREP EE awe AlT dy CREEK ee is 13

vi

Page

Wilmington Transportation Company v. Railroad Com-

mission of California (1915) 236 U.S. 151, 35S. Ct.

ee Se in EE hook ks oa vee 13, 14

Constitution

California Constitution, Art. XIII, Sec. 9........... 18

Rulings

Sales Tax Counsel Rulings, Ruling 600.0050 ....... 18

Sales Tax Counsel Rulings, Ruling 600.0080 ....... 17

Statutes

California Administrative Code, Title 18, Reg.

Es Mi ae wrk ta a eo nas aver ear on 12

California Government Code, Secs. 170-172... 2,7, 9

California Government Code, Sec. 23119 .......... 3

California Revenue and Taxation Code, Sec. 6368

PY ay tO YS arate >, ee a acco 7 oe ee

California Revenue and Taxation Code, Sec.

I on eee em re 1, 3, 4, 5, 7, 9, 10, 17

California Revenue and Taxation Code, Sec. 7051 et

NS ieceUs nS cla ch deed Wa aw ee old Ba So ew es hie whi 18

United States Code, Title 49, Sec. 902(i)........ 15, 16

United States Code, Title 49, Sec. 1054(a)(1)-(3)..15, 16

The petitioner has petitioned this Honorable Court for a

Writ of Certiorari to the Supreme Court of the State of

California, after its petition for hearing was denied by that

court following an adverse decision in the California Court

of Appeal. (M.G.R.S., Inc. v. California State Board of

Equalization, unpublished opinion filed March 7, 1980,

Supreme Court hearing denied April 30, 1980.)

This case involves a California Sales and Use Tax ex-

emption statute. Without the exemption provided in Cali-

fornia Revenue and Taxation Code sections 6368 and

6368.1,' the activities of petitioner could be constitutionally

taxed under the California Sales and Use Tax Law without

offending the Commerce Clause of the United States Con-

stitution. Petitioner has not argued to the contrary at the

Courts below and does not presently contend otherwise.

(Petition, page 13.) Consequently, there is no federal ques-

tion for this Honorable Court to decide. The petition for a

Writ of Certiorari to the United States Supreme Court should

be respectfully denied.’

In its petition, petitioner contends that the lower courts’

decision in this case conflicts with the decisions of this

Honorable Court and the federal courts of appeal. Peti-

tioner’s arguments in its petition are not new and its con-

tentions are not meritorious. Throughout its petition, peti-

tioner continues to fail to recognize that this case solely

involves the question of what was the intent of the California

'Unless otherwise stated, all statutory references are to the Revenue

and Taxation Code.

*Nothing in the recent decisions of this Honorable Court in Japan

Line, Ltd., et al. v. County of Los Angeles (1979) 441 U.S. 434, 99

S. Ct. 1813, 60 L. Ed. 2d 336, Complete Auto Transit, Inc. v. Brady

(1977) 430 U.S. 274, 97 S. Ct. 76, SI L. Ed. 2d 326 and Moorman

Mfg. Co. v. Bair (1977) 437 U.S. 267, 98 S. Ct. 2340, 57 L. Ed. 2d

197, indicates that the Commerce Clause would be offended by this

tax on petitioner.

sail Mcead

Legislature when it enacted the particular tax exemption

Statutes in issue herein. The petition seeks to reargue pe-

titioner’s contentions which were fully considered and re-

jected by the Court of Appeal. In disagreeing with the Court

of Appeal’s conclusions and seeking a reversal of its de-

cision, petitioner boldly avers that the Court of Appeal in-

correctly stated the law. Such a contention is obviously

groundless.

Furthermore, there is absolutely no inconsistency between

the Opinion of the Court of Appeal and any other decision

of this state or the United States or with Respondent Cali-

fornia State Board of Equalization’s (‘‘the Board’’) own

regulations interpreting the tax exemption statutes in issue

herein. Indeed, the only case which has interpreted these

particular statutes is Union Oil Co. v. State Board of Equal-

ization (1963) 60 Cal. 2d 441, 456, which is entirely con-

sistent with the Court of Appeal’s opinion herein and was

in fact cited by the Court of Appeal as authority supporting

denial of the exemption herein. Interestingly, petitioner fails

to refer to Union Oil in its discussion of inconsistency of

decisions or anywhere else in its petition. The reason is

evident. Further discussion of Union Oil will be made infra.

Moreover, although petitioner appears to be arguing to

the contrary, the case of People v. Weeren (1980) 26 Cal.

3d 654 is not before this Honorable Court in this proceeding.

Nevertheless, “‘the Board’’ will show that the Court of

Appeal decision herein is consistent with the California

Supreme Court’s interpretation in Weeren of the California

Legislature’s intent in 1949 when it enacted both California

Revenue and Taxation Code section 6368 (tax exemption

Statute in issue herein) and California Government Code

sections 170-172 (describing the boundaries of California.

As stated previously, it is this intent of the California Leg-

a ae

islature which is in issue herein, not any constitutional power

to tax.

Finally, ‘‘the Board’’ respectfully submits that the Court

of Appeal correctly disposed of the issues of this case and

correctly concluded that the transportation of passengers

upon the vessel *‘S.S. Catalina’’ between the Port of Los

Angeles and the harbor of the City of Avalon on Catalina

Island, both being points within the County of Los Angeles,

was not interstate or foreign commerce within the meaning

of the tax exemption provisions of California Revenue and

Taxation Code sections 6368 and 6368.1. As there is no

federal question to be resolved, there is absolutely no ne-

cessity for a writ of certiorari to the United States Supreme

Court.

Statement of Facts.

The facts with which we are concerned are substantially

uncontroverted and are contained in the ‘‘Stipulation of

Facts’’ filed on February 9, 1978 (included in the Appendix

herewith) which are summarized below.

During the period in question from January 1, 1963

through December 31, 1970 (hereinafter called ‘‘audit pe-

riod’’), the activities of petitioner were limited to the trans-

portation of passengers upon the vessel known as the *‘S.S.

Catalina’ between the port of the City of Los Angeles and

the harbor of the City of the Avalon on Santa Catalina

Island. It is to be noted that both the City of Los Angeles

and the harbor of the City of Avalon are located within the

County of Los Angeles, State of California. (Gov. Code,

§ 23119.) Petitioner’s operations were regulated solely by

the State of California through its Public Utilities Commis-

sion. No United States mail, interstate freight nor interline

passengers were carried on the 26 miles — two hours voyage

between the aforesaid two points. A minority of the pas-

ro

sengers transported by petitioner on the S.S. Catalina on

a minority of voyages were part of group package tours paid

for and operated by out-of-state travel agents. (Stipulation,

§§ 4-6).

During the audit period, petitioner made no payments

under the provisions of the California Sales and Use Tax

Law with respect to either the lease payments or for the

purchase of parts and materials in the repair and maintenance

of the vessel, or for charges for labor or services rendered

in respect thereto. (Stipulation, § 8).

On March 4, 1971, the Board issued to petitioner a notice

of determination covering the audit period based upon the

fact that ‘“‘the Board’’ determined that petitioner’s operation

of the S.S. Catalina did not come within the exemption

qualifying provisions of Revenue and Taxation Code sec-

tions 6368 and 6368.1. (Stipulation, §§ 9-10.) Conse-

quently, a tax was assessed measured by petitioner’s bare-

boat charter lease payments, the cost of tarigible personal

property purchased by petitioner which became a component

part of the S.S. Catalina in the course of repairing, cleaning,

altering or improving. (Stipulation, §9.)

On March 10, 1971, MGRS filed a petition for redeter-

mination on the ground that the operation of the S.S. Ca-

talina came within the exemption provisions of Revenue

and Taxation Code sections 6368 and 6368.1 (Stipulation,

$11.)

On December 28, 1973, ‘‘the Board’’ issued to MGRS

an adverse notice of redetermination. After paying under

protest the amount set forth in the notice of redetermination,

MORS filed a claim for refund on March 15, 1974. The

claim was denied in the amount of $28,812.04 on May 1,

1974. Thereafter, this action was commenced to recover

said amount. (Stipulation, §§ 13-17.)

eo aan

ARGUMENT.

THE CALIFORNIA COURT OF APPEAL CORRECTLY CON-

CLUDED THAT PETITIONER DID NOT SUSTAIN ITS

BURDEN OF PROVING THAT IT QUALIFIED FOR THE

EXEMPTION.

A. No Federal Question Is Presented by This Petition.

It must be reemphasized that the question in this case is

what was the intent of the California Legislature in enacting

the tax exemption provisions of sections 6368 and 6368.1.

This case does not involve the power to tax interstate or

foreign commerce. It does not involve questions under lim-

ited liability statutes or under criminal statutes or questions

of jurisdiction. It involves merely a California sales and use

tax exemption and whether such an exemption was intended

to encompass the activities of the petitioner. At page 3 of

its Opinion’ it is evident that the Court of Appeal recognized

the limited issue before it.

‘The issue before us does not involve any question

of the authority of the state or of Congress to regulate

or otherwise legislate concerning respondent’s activity.

No federal law is being disputed. The California statute

impinges on no federal legislation or regulation. The

respondent does not dispute the power or authority of

California to legislate in this field.”’

As was aforementioned, the constitutionality of the tax

herein is undisputed. There is no evidence that the impo-

sition of the sales and use tax herein in any way conflicts

with any federal rule or regulation governing the activities

of petitioner. There is no evidence that the imposition of

the tax on petitioner in fact interferes with or substantially

affects directly or indirectly the commerce of any sister state

‘A copy of the Court of Appeal Opinion is included in the Appendix

hereto.

eee Ute

or foreign nation. Indeed, without the exemption provided

in sections 6368 and 6368.1 the activities of petitioner would

be fully taxable by ‘‘the Board’’. Accordingly, no federal

question is presented by this petition.

B. Uniformity of Decisions Has Been Maintained by

the Court of Appeal.

It is in light of the limited issue of this case that peti-

tioner’s contention that conflicts have been created by the

Opinion of the Court of Appeal must be read.

1. The Effect of the Weeren Case.

Petitioner refers to the Weeren case repeatedly in its pe-

tition. (Petition, pp. 1, 2, 15, 16.) Unfortunately, it appears

_ that petitioner has misread Weeren. Contrary to petitioner’s

assertions at page 2 of its petition, the California Supreme

Court did not extend the boundary of California in violation

of the ruling in United States v. California (1965) 381 U.S.

139, 85 S. Ct. 1401, 14 L. Ed. 2d 296. Clearly, the Cal-

ifornia Supreme Court followed United States v. California:

‘*Here, consistent with the high court’s conclusion

in California II, we determine only that Santa Barbara

Channel is outside California’s boundaries for purposes

of federal law, and that California’s boundaries are

those which are established under the Act as interpreted

in California II. The channel is thereby excluded from

California’s boundaries. It follows that when defend-

ants committed the acts for which they were convicted,

they were not within California’s inland waters... .

We agree with the People’s assertion that federal

law does not prohibit California’s assertion of penal

jurisdiction over defendants even though at the time

of their commission of the charged offenses they acted

outside of California’s territorial limits as defined for

federal purposes.’’ People v. Weeren, supra, 26 Cal.

3d 654, 666. (Emphasis in Original).

le

The conviction of the fisherman in Weeren was upheld

not because the criminal activities were held to have oc-

curred within California’s boundaries but because in matters

affecting its legitimate interests a state may regulate the

conduct of its citizens upon the high seas where no conflict

with federal law is presented. Skiriotes v. Florida (1941)

313 U.S. 69, 77, 61 S. Ct. 924, 85 L. Ed. 1193. Weeren

goes no further.

For purposes of the instant case, the analysis of the Cal-

ifornia Supreme Court in Weeren of the intent of the Cal-

ifornia Legislature in 1949 when it enacted both section

6368 and California Government Code sections 170-172 is

particularly enlightening and supports ‘‘the Board’s’’ po-

sition herein.

As stated previously, the intent of the California Legis-

lature in enacting sections 6368 (in 1949) and 6368.1 (in

1965) of the Revenue and Taxation Code is the issue of this

case. In Weeren, the California Supreme Court stated the

following with respect to the California Legislature’s intent

in 1949;

‘‘The People of California have purported to de-

scribe their own boundaries both constitutionally and

legislatively. Both the 1849 and 1879 Constitutions in

article XXI, section 1, described the California sea

boundary as extending ‘three English [i.e., nautical]

miles’ into the Pacific Ocean, running ‘in a northwes-

terly direction and following the direction of the Pacific

Coast. . . Also, including all the islands, harbors, and

bays along and adjacent to the coast.’ (Italics added;

see present art. III § 2.)

To implement the foregoing constitutional provision

the Legislature in 1949 enacted Government Code sec-

tion 170 which recites: ‘To give greater precision to

the [constitutional description], it is hereby declared

that the [sea] . . . boundary . . . runs and has in the

pat

past run three English nautical miles oceanward of lines

drawn along the outer sides of the outermost of the

islands, reefs, and rocks along and adjacent to the

mainland and across intervening waters; . . .’ (Italics

added.)

Section 171, in turn, provides that all water between

the mainland and the island-encircling lines described

in section 170 ‘are declared to be and to have been in

the past inland waters of the State.’ (Italics added.)

The current article III, section 2, of the Constitution,

which was adopted in 1972 to replace the 1849-1879

description, declares that the state’s boundaries ‘are

those stated in the Constitution of 1849 as modified

pursuant to statute.’ (Italics added.)

All parties concede that the Santa Barbara Channel,

including the position at which the Comanche was

boarded, is ‘inland waters under the current state con-

stitutional and statutory language. Must these state

declarations yield to the preeminence of federal leg-

islative and judicial expression?’’ People v. Weeren,

supra, 26 Cal. 3d 654, 660-661. (Emphasis added.)

Further, in rejecting the defendants’ contention that the

violations in issue, which occurred in Santa Barbara Chan-

nel, occurred beyond the traditional territorial limits of Cal-

ifornia, the California Supreme Court stated:

sé

. . . The completed violations in the case before us

occurred well within the state boundaries as defined

by our state Constitution and statutes. (Cal. Const.,

art. III], § 2; Gov. Code, §§ 170-171, all supra.) These

are the limits to which the Legislature implicitly in-

tended to extend California’s criminal laws, including

Fish and Game Code section 2000. As we have ob-

served, California’s territorial boundaries and, there-

fore, the extent of its criminal jurisdiction are restricted

when they conflict with federal and international law.

The factual record before us presents no such conflict.”?

Haale!

People v. Weeren, supra, 26 Cal. 3d 654, 669-670.

(Emphasis added. )

Clearly, in the California Legislature’s mind in 1949

when it enacted in the same session, both Government Code

sections 170-172 and Revenue and Taxation Code section

6368, | 2 boundaries of California included the Santa Ca-

talina Channel, and thus any water transportation between

Los Angeles and Avalon was considered to be solely intra-

state in nature. Logically, it must be concluded that the

California Legislature did not consider activities such as

petitioner’s to constitute interstate or foreign commerce

within the purview of sections 6368 or 6368.1. The sections

must be construed in harmony with the other California

statutory provisions. As the California Supreme Court stated

in the very recent decision of /nternational Business Ma-

chines v. State Board of Equal. (1980) 26 Cal. 3d 923, 932:

**.. . It is, however, ‘an established rule of statutory

construction that similar statutes should be construed

in light of one another. . . . ‘[A]pplication of the rule

that statutes in pari materia should be construed to-

gether is most justified, and light from that source has

the greatest probative force, in the case of statutes

relating to the same subject matter that were passed or

approved or take effect on the same day.’ * (People

v. Caudillo (1978) 21 Cal. 3d 562, 585.)”

As the issue of this case involves the intent of the Cali-

fornia Legislature, it is evident that the Court of Appeal’s

Opinion herein is consistent with the analysis thereof in

Weeren and should be sustained.

2. The Court of Appeal Opinion Is Consistent With the Union Oil

Case — the Only Other Case Analyzing the Tax Exemption

Statutes in Question.

The instant case does not involve a federal law. It involves

merely California Sales and Use Tax Statutes which permit

er SS

an exemption from tax under certain specified conditions.

It must be kept in mind that in construing an exemption

statute, the applicable rule is that since tax exemptions are

solely a matter of legislative grace, they are to be strictly

construed against the taxpayer. Santa Fe Transp. v. State

Board of Equal. (1959) 51 Cal. 2d 531, 593; Coast Elevator

Co. v. State Bd. of Equalization (1975) 44 Cal. App. 3d

576, 587; Western Contracting Corp. v. State Board of

Equalization (1974) 39 Cal. App. 3d.341, 349; Hotel Del

Coronado Corp. v. State Board of Equalization (1971) 15

Cal. App. 3d 612, 617. Any and all doubt must therefore

be resolved against the right to the exemption. Standard Oil

Co. v. State Board of Equalization (1974) 39 Cal. App. 3d

765, 769-770. If an interpretation of the statute is reasonable

in disallowing the exemption, the construction must be

adopted, for it ‘‘is of no moment that the statute may be

ambiguous, or that a contrary construction might also be

reasonably permissible.’’ Hospital Service of California v.

City of Oakland (1972) 25 Cal. App. 3d 402, 406.

The Court of Appeal’s decision that petitioner’s activities

were not interstate or foreign commerce within the meaning

of the sections 6368 and 6368.1 is a strict, yet reasonable

construction of the exemption and does not conflict with

any other reported decision of this or any court.

As was stated previously, the only other case which has

interpreted the exemption statutes in question herein is

Union Oil Co. v. State Bd. of Equal. (1963) 60 Cal. 2d

441. Union Oil is completely consistent with the Court of

Appeal’s Opinion and was in fact cited therein as authority

supporting denial of the exemption.

In rejecting petitioner’s contentions that it qualified for

the exemption because some of its passengers are passengers

in interstate or foreign commerce, the Court of Appeal cor-

rectly stated the relevant law at pages 9-10 of its Opinion:

‘*In addition to the ‘high seas’ argument, respondent

[petitioner herein] claims that some of its passengers

are passengers in interstate or foreign commerce. This

is based on the stipulation that a minority of the total

passengers on a minority of voyages were parts of a

group package tours paid for and operated by out-of-

State travel agents. This argument may be dismissed

as de minimis. In a suit for tax refund, the burden of

proof rests upon the party seeking the refund. He must

show not only that the tax assessment was in error but

also prove sufficient facts upon which a correct as-

sessment can be made. (People v. Schwartz (1947) 31

Cal. 2d 59, 64-66; Sunshine Art Studies of California,

Inc. v. State Bd. of Equalization (1974) 39 Cal. App.

3d 223, 230-231.) In order to qualify for the claimed

exemption of section 3638 [6368] it was respondent’s

burden to prove that the principal use of the watercraft

was transportation for hire in interstate or foreign com-

merce. A minority of the passengers on the minority

of the trips (whatever that may mean), does not prove

that the principal use of the vessel was in interstate

commerce or that a principal use was in transporting

such types of passengers. (Union Oil Co. v. State Bd.

of Equal. (1963) 60 Cal. 2d 441, 456-457.) To the

contrary, it infers that on infrequent occasions some

few passengers were sightseers or tourists from out of

state. There is no proof of any interstate tourist business

or negotiations therefor conducted by respondent. Nei-

ther is there any proof that respondent served as some

sort of connecting passenger carrier between two in-

terstate carriers. Admittedly, ‘there is no single concept

of interstate commerce .. .’ (McLeod v. Threlkeld,

supra, 319 U.S. 491, 495.) Also, we recognize that

almost any local activity which may have only a remote

and tenuous relationship with travel or other interstate

commerce can be said to affect interstate commerce,

at |, ome

thus enabling Congress to regulate it in order to pro-

mote some publicly accepted and judicially recognized

interest (e.g. see Wickard v. Filburn (1942) 317 U.S.

111.) But neither Congress nor the State have so clas-

sified respondent’s activity. Until and unless Congress

or the state so declare, the out-of-state tourist status

of some few of its passengers does not truly change

the local intra-state character of respondent’s activity.’’

Furthermore, it should be noted that the above statement

by the Court of Appeal is consistent with the relevant reg-

ulation of *‘the Board.’’ (Cal. Admin. Code, tit. 18, Reg-

ulation 1594(a)(2)). This regulation was upheld as a rea-

sonable interpretation of section 6368 by the California

Supreme Court in Union Oil, 60 Cal. 2d 441, 456-457. Cal.

Admin. Code, tit. 18, Regulation 1594(a)(2) provides as

follows:

‘*(a) GENERAL EXEMPTIONS. Tax does not

apply to the sale of nor to the storage, use, or other

consumption of watercraft which are used, leased to

a lessee for use, or sold to persons for leasing to lessees

for use for any of the following purposes:

(2) to make voyages both in interstate or foreign

commerce and voyages that are exclusively in intrastate

commerce where the principal use of the watercraft is

transportation for hire in ‘nterstate or foreign com-

merce. The tax applies with respect to watercraft mak-

ing voyages both in interstate or foreign commerce and

voyages that are exclusively in intrastate commerce

where the principal use of the watercraft is in intrastate

commerce. (Emphasis added.)

As the Court of Appeal correctly noted, at page 10, the

Stipulation of Facts in this case provides that a minority of

passengers on a minority of trips were part of group package

tours paid for and operated by out-of-state travel agents.

The Court of Appeal analyzed the relevant law set forth in

Union Oil and correctly concluded that such facts do not

prove that the principal use of the S.S. Catalina was in

interstate or foreign commerce or that a principal use was

in transporting such types of passengers.

It is evident that the Court of Appeal decision in this case

is consistent with the only other case analyzing the tax

exemption statutes in question and with the regulations of

‘‘the Board’’ as well. Petitioner has cited to this Honorable

Court nothing in opposition to the above.

3. No California, Federal or United States Supreme Court Case

Has Been Cited by Petitioner Which Defines the Specific Ac-

tivity of Petitioner to Be Interstate or Foreign Commerce.

Throughout its petition, petitioner places heavy reliance

upon Lord v. Goodall, etc. (1880) 102 U.S. 541, 26 L. Ed.

224. The decision in that case does not provide relief to

petitioner herein.

The Court of Appeal correctly noted at page 6 of its

Opinion that Lord was not followed by the California Su-

preme Court in Wilmington T. Co. v. Railroad Commission

(1913) 166 Cal. 741, nor by this Honorable Court in Wil-

mington Transportation Company v. Railroad Commission

of California (1915) 236 U.S. 151, 35 S. Ct. 276, 59 L.

Ed. 508, which affirmed the California Supreme Court’s

decision in 166 Cal. 741.

In Wilmington, the California Supreme Court in dis-

cussing Lord stated the following:

**.. . The conclusion that the limited liability law

was applicable was undoubtedly correct for the reason

stated in the later case of Lehigh Valley R.R. Co. v.

Pennsylvania, 145 U.S. 192, [36 L. Ed. 672, 12 Sup.

Ct. Rep. 806], but.in view of what is said in the latter

case as to the true ground of decision in the Lord case,

ear

we do not feel bound to follow the views expressed in

the Lord case as to what constitutes commerce with

foreign nations.’’ Wilmington et al. v. Railroad Comm.,

supra, 166 Cal. 741, 746 (Emphasis added. )

This Honorable Court affirmed the California Supreme

Court’s decision in Wilmington and was very careful not to

state that it agreed with Lord.

‘Relying upon Lord v. Steamship Co., 102 U.S.

541, the plaintiff in error contends that transportation

over the high seas is “commerce with foreign nations’

in the constitutional sense. (See Lehigh Valley R.R. v.

Pennsylvania, 145 U.S. 192, 203; the Abby Dodge,

223 U.S. 166, 176.) But if it be assumed for the present

purpose that the power of Congress extends to the

subject of this controversy, the fact remains that the

power has not been exercised . . . It is not necessarily

determinative that the vessels in the course of the trans-

portation in question pass beyond the boundary of the

State. See The Hamilton, 207 U.S. 398, 405.’’ Wil-

mington Transportation Co. v. Railroad Commission,

et al., supra, 236 U.S. 151, 153-154. (Emphasis

added. )

The Court of Appeal correctly stated at pages 3-5 that

this Honorable Court in Lehigh Valley R. Co. v. Common-

wealth of Pennsylvania (1891) 145 U.S. 192, 203, 12 S.

Ct. 806, 36 L. Ed. 672, explained the ground for the de-

cision in Lord as being the right of Congress to limit liability

under its maritime jurisdiction. Had Lord been seen by this

Honorable Court as standing for the proposition put forth

herein by petitioner, the case would have been decided

differently. :

Moreover, petitioner’s reliance upon Cornell Steamboat

Co. v. U.S. (1943) 321 U.S. 634, 64S. Ct. 758, 88 L. Ed.

978, was properly rejected by the Court of Appeal at pages

a a

5 and 6 because of the dissimilarity of the facts with the

* instant case.

Finally, nothing in the two related cases of United States

v. California (1947) 332 U.S. 19, 67 S. Ct. 1658, 91 L.

Ed. 1889, and United States v. California (1965) 381 U.S.

139, 85S. Ct. 1401, 14L. Ed. 2d 296 holds that all activities

beyond the territorial waters is necessarily interstate or for-

eign commerce. Commerce among the States is not a tech-

nical legal conception but a practical one, drawn from the

course of business. Swift and Company v. U.S. (1904) 196

U.S. 375, 398, 25 S. Ct. 276, 49 L. Ed. 518. (Justice

Holmes speaking for a unanimous court.)

In all, petitioner is unable to refer the courts below or

this Honorable Court to any case which has held that the

activity of petitioner is interstate or foreign commerce.

C. The Specific Activity of Petitioner at the Place

Where It Occurred Has Not Been Declared Inter-

state or Foreign Commerce by Any State or Federal

Statute.

Petitioner cites no authority contrary to the above in its |

petition. In fact, it should be noted (and petitioner does not

disagree) that the definition of ‘‘interstate or foreign com-

merce’’ for purposes of water transportation under the In-

terstate Commerce Act would exclude the voyage between

Los Angeles and Avalon. Furthermore, no exemptions un-

der the Act are provided for such a voyage between two

points within the same state.

49 United States Code section 902(i) states:*

“It is to be noted that effective September 14, 1978, 49 United States

Code section 902(i) was revised and renumbered as 49 United States

Code section 1054(a)(1)-(3). The revision does not alter the above

definition.

a, se

‘‘The term ‘interstate or foreign transportation’ or

‘transportation in interstate or foreign commerce,’ as

used in this chapter, means transportation of persons

or property —

‘*(1) wholly by water from a place in a State to

any other State, whether or not such transportation

takes place wholly in the United States;

‘*(2) partly by water and partly by railroad or motor

vehicle, from a place in a State to a place in any other

State; except that with respect to such transportation

taking place partly in the United States and partly out-

side thereof, such terms shall include transportation by

water only insofar as it takes place from a place in the

United States to another place in the United States;

‘*(3) wholly by water, or partly by water and partly

by railroad or motor vehicle, from or to a place in the

United States to or from a place outside the United

States, but only (a) insofar as such transportation by

rail or by motor vehicle takes place within the United

States, and (b) in the case of a movement to a place

outside the United States, only insofar as such trans-

portation by water takes place fim any place in the

United States to any other place therein prior to trans-

shipment at a place within the United States for move-

ment to a place outside thereof, and, in the case of a

movement from a place outside the United States, only

insofar as such transportation by water takes place from

any place in the United States to any other place therein

after trans-shipment at a place within the United States

in a movement from a place outside thereof.’’

Subdivision (1) is inapplicable because no state other than

California is involved. Subdivision (2) is inapplicable since

railroad or motor vehicle transportation is not present. Sub-

division (3) has no application since the destination is not

outside the United States and the transshipment of persons

or property is not present.

pay

The water transportation between Los Angeles and Ava-

lon involves the movement between two points of one

county of the State of California and consequently does not

come within the express provisions of the Interstate Com-

merce Act. As stated in the Stipulation of Facts (4 5) pe-

titioner conducted its activities ‘‘pursuant solely to authority

granted by the California Public Utilities Commission.’’

Clearly, the activities of petitioner did not constitute inter-

State or foreign commerce under federal statutory law.

D. The Board’s Longstanding Administrative Inter-

pretation of Sections 6368 and 6368.1 Is Consistent

With the Court of Appeal’s Decision Herein and Is

Entitled to Great Weight When Being Judicially

Reviewed.

In administering the California Sales and Use Tax Law,

‘‘the Board’’ has consistently held since at least 1954 (well

before the audit period) that the phrase ‘‘interstate or foreign

commerce’’ for purposes of sections 6368 and 6368.1, was

not intended to cover the situation where a vessel travels

in part on the high seas in the course of its journey to and

from California ports.

In 1954, ‘‘the Board’’ issued Sales Tax Counsel Ruling’

600.0080 as follows: ‘‘The fact that vessels travel in part

on the high seas in the course of their journeys to and from

California ports does not exempt them under Section 6368

from California use tax as being used in interstate or foreign

commerce.’’

*Sales Tax Counsel Rulings are issued by the Board in response to

specific requests from taxpayers. Short abstracts of the rulings regularly

appear in Commerce Clearing House, Prentice Hall and the Business

Taxes Law Guide in order that taxpayers in the same field may be given

guidance.

et ae

In 1971, *‘the Board’’ issued Sales Tax Counsel Ruling

600.0050 as follows:

‘*A steamship company, not regulated by the Inter-

state Commerce Commission, carrying no interstate

passengers or freight from California to Catalina Island

through the high seas was not exempt from the sales. -.

and use tax on rental receipts or purchases of parts and

material to maintain the vessels, since the operation

was a local activity and did not qualify for the ex-

emption for watercraft transporting persons or property

in interstate commerce. Even though a portion of the

journey was on the high seas, the transportation did

not occur in interstate commerce.”’

‘The Board’s’’ reasoning is basically that the mere fact

that high seas are traveled upon as a means to journey

between two points .within the same county of California

is insufficient in itself to render the otherwise completely

‘‘local’’ activity as being in interstate or foreign commerce

for purposes of the exemption sections. As the phrase ‘‘in-

terstate or foreign commerce’’ is susceptible to various inter-

pretations under various statutes, ‘‘the Board’s’’ interpre-

tation for purposes of the particular statutes in question

herein is reasonable and is entitled to the ‘‘great weight’’

standard of judicial review. Culligan Water Conditioning

v. State Board of Equalization (1976) 17 Cal. 3d 86, 92-

93.

‘‘The Board’’ is a constitutional body (Cal. Const. art.

XIII, § 9) authorized by the Legislature to administer and

enforce the sales and use tax law, Revenue and Taxation

Code section 7051, et seq., with power to adopt rules and

regulations. American Distilling Co. v. State Board of

Equalization (1942) 55 Cal. App. 2d 799, 805. In connec-

tion with these powers, the Legislature has conferred a de-

gree of discretion on “‘the Board.’’ So long as that discretion

_

is executed within the scope of the controlling statute, it

will not be disturbed by the court; and unless ‘‘the Board’s”’

action can be characterized as arbitrary, capricious, or pat-

ently unreasonable, the weight of the authorities enjoins any

further incursion by the court into ‘‘the Board’s’’ exercise

of the authority delegated to it by the Legislature. Henry's

Restaurants of Pomona, Inc. v. State Board of Equalization

(1973) 30 Cal. App. 3d 1009, 1020-1021; approved in Cul-

ligan Water Conditioning v. State Board of Equalization,

supra, 17 Cal. 3d 86, 92-93.

If ‘‘the Board’’ has promulgated a formal regulation de-

termining the proper classification for the imposition of the

sales or use tax and the regulation has been challenged in

an action for refund of the tax paid, the proper scope of

reviewing said regulation would be one of limited judicial

review. Culligan Water Conditioning v. State Bd. of Equal-

ization, supra, 17 Cal. 3d 86, 92; Henry's Restaurants of

Pomona, Inc. v. State Bd. of Equalization, supra, 30 Cal.

App. 3d 1009, 1020-1021; Mission Pak Co. v. State Bd.

of Equalization (1972) 23 Cal. App. 3d 120, 124-125; Car-

mona v. Division of Industrial Safety (1975) 13 Cal. 3d 303,

309-310; Pitts v. Perluss (1962) 58 Cal. 2d 824, 834-835.

Where there is an administrative interpretation of a stat-

ute, such interpretation will be accorded great weight by the

court and will be followed if not clearly erroneous. Select

Base Materials, Inc. v. Bd. of Equalization (1959) 51 Cal.

2d 640, 647; Coca-Cola Co. v. State Bd. of Equalization

(1945) 25 Cal. 2d 918, 921.

If reasonable minds may well be divided as to the wisdom

of ‘‘the Board’s’’ action, its action is conclusive, or stated

another way, if there appears to be some reasonable basis

for the administrative classification, a court will not sub-

stitute its judgment for that of ‘‘the Board.’’ The burden

of proof of invalidity rests with the taxpayer. Rible v.

Hughes (1944) 24 Cal. 2d 437, 445; Action Trailer Sales,

Inc. v. State Board of Equalization (1975) 54 Cal. App. 3d

125, 132-133.

The contemporaneous administrative construction and

interpretation of the Constitution, the statutes and its own

regulations by ‘‘the Board’’ is entitled to great weight, and

the courts generally will not depart from such construction

and interpretation unless it is clearly erroneous or unau-

thorized. Such construction and interpretation is a question

of law, the ultimate resolution of which rests with the courts.

Coca-Cola Co. v. State Board of Equalization, supra, 25

Cal. 2d 918, 921; Rivera v. City of Fresno (1971) 6 Cal.

3d 132; Culligan Water Conditioning v. State Board of

Equalization, supra, 17 Cal. 3d at 93; Carmona v. Division

of Industrial Safety, supra, 13 Cal. 3d 303, 310; Merrill

v. Department of Motor Vehicles (1969) 71 Cal. 2d 907,

917. :

An administrative interpretation which has existed for a

number of years is entitled to even greater consideration

since it ‘‘suggests legislative acquiescence.’ Great Western

Financial Corp. v. Franchise Tax Board (1971) 4 Cal. 3d

Py Z

The interpretation of ‘‘the Board’’ herein becomes even

more reasonable when the Stipulation of Facts are closely

scrutinized. It is undisputed that petitioner’s activity in-

volved no contact with any other state or foreign country.

No United States mail, interstate freight or interline pas-

senger® was carried on the S.S. Catalina. Petitioner was not

regulated by any federal, foreign or non California govern-

mental body. Clearly, ‘‘the Board’s’’ interpretation of the

exemption statutes, with which the Court of Appeal con-

curred, reaches a reasonable. result rather than the absurd

one urged by petitioner herein. ‘‘The Board’s’’ interpreta-

tion and Court of Appeal’s decision result in a strict yet

en eo

reasonable construction of these statutes which is exactly

what the law requires. Accordingly, it must be held that the

Court of Appeal correctly concluded that petitioner's burden

of proving it qualified for the exemption has not been sus-

tained.

Conclusion.

There is no federal question presented by this petition.

There is no question as to the power of ‘‘the Board”’ to tax

petitioner's activities. No questions of jurisdiction to tax

have been raised. No evidence has been presented by pe-

titioner that ‘‘the Board’s’’ imposition of the tax on the

activities of petitioner in fact conflicts with any federal rule

or regulation governing petitioner's activities or interferes

with or substantially affects directly or indirectly the com-

merce of some sister state or foreign nation.

This case merely involves a California sales and use tax

exemption and whether such exemption was intended by

the California Legislature to encompass the activities of

petitioner. Although none of the facts and points raised in

this brief alone conclusively prove whether the California

Legislature intended to encompass activities such as peti-

tioner’s when it enacted the exemption statutes, taken to-

gether they strengthen the conclusion reached by the Court

of Appeal that the Legislature did nor intend to do so.

_

From the foregoing, it is evident that the petition is not

meritorious. Accordingly, ‘‘the Board’’ respectfully re-

quests that the relief sought by petitioner be denied.

Respectfully submitted,

GEORGE DEUKMEJIAN,

Attorney General,

ARTHUR C. DE GOEDE,

Assistant Attorney General,

EDMOND B. MAMER,

PHILIP C, GRIFFIN,

LAWRENCE K. KEETHE,

JEFFREY M. VESELY,

Deputy Attorneys General,

By JEFFREY M. VESELY,

Deputy Attorney General,

Attorneys for Respondent.

APPENDIX.

In the Court of Appeal of the State of California. Second

Appellate District, Division Two.

M.G.R.S., Inc., a California «poration, Plaintiff and

Respondent, vs. California State Board of Equalization,

Defendant and Appellant. 2 Civ. No. 56238, (Super. Ct.

No. C96419.)

Filed: March 7, 1980.

APPEAL from a judgment of the Superior Court of Los

Angeles County. William P. Hogoboom, Judge. Reversed

with directions.

George Deukmejian, Attorney General, and Arthur C.

DeGoede, Edmond B. Mamer, Philip C. Griffin, Lawrence

K. Keethe, and Jeffrey M. Vesely, Deputy Attorneys Gen-

eral, for Defendant and Appellant.

James H. Lyons and J. Terence Lyons, for Plaintiff and

Respondent.

NATURE OF APPEAL:

Appellant, State of California, through its State Board

of Equalization (Board) appeals from the judgment of the

Superior Court exempting respondent M.G.R.S., Inc.

(MGRS) from payment of sales or use tax.

ISSUE:

The appeal presents the simple question: ‘‘Is the trans-

portation of passengers upon the vessel ‘S.S. Catalina’ be-

tween the port of Los Angeles and the harbor of the City

of Avalon on Catalina Island, both being points within the

County of Los Angeles, interstate commerce within the

meaning of Revenue and Taxation Code sections 6368. 1?"’

OUR DECISION:

ooetiioks

We hold that it is not and we reverse.

FACTS:

The parties submitted the case to the trial court upon a

written stipulation of facts. MGRS is a California corpo-

ration whose business was limited to transportation of pas-

sengers between the Port of Los Angeles and Avalon on

Catalina Island. The distance between the two points is

approximately 26 miies. Both points are located within the

County of Los Angeles and the State of California. The trip

takes approximately two hours one way. MGRS was reg-

ulated solely by the California State Public Utilities Com-

mission. No United States mail, interstate freight nor in-

terline passengers were carried on the trip between the two

points. On a few occasions, a minority of the passengers

transported were part of group package tours paid for and

operated by out-of-state travel agents. The Board imposed

certain taxes under the Use and Sales Tax Law. MGRS paid

under protest and thereafter sought recovery on the basis

that its activity was excluded because it was engaged in

interstate commerce and the law which otherwise imposed

the tax on such business excluded those which were in

interstate commerce.

THE STATUTORY PROVISIONS:

California imposes a Sales and Use Tax on the type of

activity in which MGRS is engaged. (‘‘California Use Tax

Law’’, Rev. & Tax. Code, div. 2, part 1, §§ 6001, et seq.)

Revenue and Taxation Code sections 6368 and 6368.1,'

specifically exempt receipts from the use or sales and lease

for such use of water craft for use in interstate or foreign

commerce.

DISCUSSION:

‘References hereafter to sections 6368 and 6368.1 are to the Revenue

and Taxation Code.

eh PTs

The issue before us does not involve any question of the

authority of the state or of Congress to regulate or otherwise

legislate concerning respondent’s activity. No federal law

is being disputed. The California statute impinges on no

federal legislation or regulation. The respondent does not

dispute the power or authority of California to legislate in

this field. Respondent instead asserts that it seeks to have

enforced the law as written and to be excluded from the tax

by reason of its claim that it, respondent, is engaged in

interstate commerce. However, we conclude that under the

facts at bench, respondent’s contentions are reduced to the

argument that respondent’s activity could possibly be de-

fined as being interstate commerce and therefore exempting

respondent from the tax. The exemption, however, applies

only to vessels which actually are engaged in or used in

interstate commerce, not upon activity which could be so

defined. The specific activity of respondent at the place

where it occurred has not been declared interstate commerce

by any state or federal statute. Nor has it been so defined

by any California Supreme Court or appellate case or any

United States Supreme Court decision.

Some cases relied upon by respondent at first blush seem

to hold that similar conduct has been described as interstate

commerce. Examination of such cases discloses totally dis-

similar facts upon which they can be distinguished. More

importantly, other California and United States Supreme

Court cases have demonstrated that this type of activity

present at bench is not interstate commerce.

Relying upon language used in Lord v. Goodall etc. S.Co.

(1880) 102 U.S. 541, respondent asserts that it is engaged

in interstate or foreign commerce because its vessel the S.S.

Catalina, like the vessel Ventura in Lord, traveled upon the

‘high seas’’, i.e. beyond the territorial or three-mile sea-

ward limit of the State of California’s shoreline. But Lord

3°

re ie

is of little comfort to respondent. In Lord the steamship

Ventura transported passengers and cargo between San

Francisco and San Diego. On one such voyage the vessel

was lost. In affirming the applicability of the federal statute

which limited liability, the United States Supreme Court

stated that in its voyage the vessel traveled 480 miles and

that the vessel went out of California and out of the United

States as well, far out onto the Pacific Ocean. The court

declared that the vessel entered on navigation which was

“connected with other nations.’’ It said, ‘‘In every just

sense, therefore, she was, while on the ocean, engaged in

commerce with foreign nations, and as such she and the

business in which she was engaged were subject to the

regulating power of Congress.’’ (/d. at p. 544.)

However, the statement in Lord that the federal statute

was applicable because the ship was engaged in interstate

commerce and that this was because of its travel on the

Pacific Ocean, was expressly rejected and repudiated and

the case expressly disapproved on this ground in both the

state Supreme Court and the United States Supreme Court

opinions in the later case of Wilmington T. Co. v. Railroad

Commission (1913) 166 Cal. 741, and in Wilmington Trans-

portation Company v. Railroad Commission of California

(1915) 236 U.S. 151, affirming the Supreme Court of Cal-

ifornia’s decision in 166 Cal. 741. As explained in both

decisions, Lord was not a case of determining the existence

of interstate commerce but instead involved the initial au-

thority of Congress to enact legislation relative to and ap-

plicable to all ships in navigation, i.e. the right to limit

liability under the maritime jurisdiction. There was present

in Lord an act of Congress which applied to the activity

involved. That activity was the loss at sea which caused the

operation of the statute. Both the state and the United States

Supreme Court decisions in Wilmington recognize that that

iad

part of the discussion in Lord concerning the existence of

interstate commerce had earlier been renounced by the

United States Supreme Court in Lehigh Valley R. Co. v.

Commonwealth of Pennsylvania (1891) 145 U.S. 192, and

in Ex Parte Garnett (1891) 141 U.S. 1, 12. As explained

in Garnett, the maritime limited liability statute was appli-

cable to vessels and ships in navigation whether engaged

in interstate commerce or not. Such maritime laws apply

to all vessels on all navigable waters whether the vessel is

operating within or beyond the territorial waters of the state

(Butler v. Boston & Savannah Steamship Co. (1888) 130

U.S. 527) and may be applicable or operate irrespective of

the commerce clause or of the presence or absence of in-

terstate commerce in the particular case. (Moragne v. State

Marine Lines (1970) 398 U.S. 375.)

Respondent also relies on Cornell Steamboat Co. v.

United States (1943) 321 U.S. 634. In defining interstate

commerce for the purpose of commerce by water and the

regulation thereof, the court in Cornell held that part of the

Interstate Commerce Act regulating certain common carriers

by water apply to vessels traveling between two points in

the same state but which pass through the waters of another

state. But present in Cornell were two features absent at

bench. They are: (1) while en route between two points in

New York, the voyage of the ship passed through the waters

within the boundary of New Jersey, another state, and (2)

Congress had enacted legislation covering that very type of

activity which the federal government sought to regulate.

Moreover, the court expressly noted that such definition did

not include certain types of cases involving transportation

where the terminal points are located within the same state

for the purpose of removing the activity from state taxation

expressly citing Wilmington Transportation Company v.

Railroad Commission of California, supra, 236 U.S. 151.

aw Me

The facts at bench are different than in Cornell. As stip-

ulated, in ferrying its passengers back and forth in this

narrow channel, MGRS in no way contacted any activity

of any other state or foreign country. By crossing the chan-

nel, respondent MGRS entered the territory of no other

state, passed no other state or foreign country, nor entered

the waters thereof. It carried no United States mail, interstate

freight or interline passengers. It did nothing that required

regulation by the federal government. It was not regulated

by any federal, foreign or non-California governmental

body. Comparing these facts to the facts in Wilmington is

instructive. In Wilmington the state sought to control the

rates charged for carrying passengers and cargo from San

Pedro to Avalon, the same route and activity as present at

bench. Holding that the activity was not exempt from state

control on the claimed basis that it was interstate commerce

and subject only to congressional control, the California

Supreme Court said: ‘‘Vessels plying between San Pedro

and Avalon cross the high seas for the sole purpose of

getting from one point in Los Angeles County to another

point in the same county. They do not touch at any other

port, either of the United States or of any foreign country.

They do not transfer their passengers or freight to any other

vessel or receive the same from any other vessel in their

course. They do not on the voyage take on or put off any

article of commerce. While a portion of the voyage is on

the high seas, the navigation thereof is merely incidental

to the real purpose of the voyage, which is to ply between

two ports, both of which are located in the same county in

this state.’’ (Wilmington T. Co. v. Railroad Commission,

supra, 166 Cal. 741, 743.)

In affirming and approving this decision, the Supreme

Court of the United States agreed adding its language as

follows:

winnitesdes

‘‘We are not here dealing with the case of property

which is in course of continuous transportation to an-

other State or to a foreign country. [Citations.] It must

be assumed upon this record that the State claims the

right to exercise its authority only as to transportation

between the mainland and the island and solely with

respect to such shipments over this route as are local

to the State, both as to the beginning and the end of

the transportation. There is no passage through the

territory of another State; the transportation, in its entire

course, is subject to a single authority — either that

of Congress or that of the State — and the latter would

yield to the exercise of the former. The sovereignty of

no other jurisdiction is encountered. It is plainly of

importance to the people of the State that this local

traffic should be carried upon reasonable terms; and

if, in the case of a ferry, a State may protect its people

from exto:tion although the ferriage is to the shore of

another State, there is in our judgment no ground for

saying that where the transportation is between two

places in the same State it is less a subject for local

action, in the absence of Federal interposition, because

the voyage is over a stretch of open sea. Congress has

not attempted to intervene, and we find no basis for

the conclusion that the subject is one which must be

deemed to be wholly free from regulation unless Con-

gress deals with it. On the contrary, it is precisely of

that local character which permits it to be left appro-

priately to the care of the State.’’ (Emphasis added.)

(Id. at p. 156.)

Both appellant and respondent devote much discussion

to the issue of the territorial boundaries of California and

whether or not the state has the power or authority to ‘‘reg-

ulate beyond its territorial jurisdiction.’’ Respondent claims

that the two related cases of United States v. California in

(1947) 332 U.S. 19 and the subsequent decision in United

ee

States v. California (1965) 381 U.S. 139, are authority for

the proposition that California cannot claim nor exercise

authority beyond the historic three-mile limit, parallel and

seaward of its coastline because such area constitutes the

high seas rather than the inland waters of the state. The

holdings of these cases are irrelevant for our purposes here.

The existence of the official territorial limits of California

is relevant only to determine the fact that the vessel here

does in fact travel upon high seas and beyond the inland

waters of the state.

But as indicated before, there is no dispute and we do

not dispute that in its travel the S.S. Catalina traveled upon

the high seas. However, the activity in issue here was not

subject to congressional regulation. The result is that respon-

dent would claim that it is by definition presently under no

authority or regulation by any jurisdiction. But nothing in

the companion cases of United States v. California, supra,

holds that the State of California may not impose a use tax

on the activity simply because of the definition and deter-

mination of the territorial limits in those cases, which con-

cerned the application of the Submerged Tidelands Act. The

cases do not hold that all else beyond the territorial waters

of California is necessarily interstate or foreign commerce.

In both of the United States v. California cases, there existed

the conflict in the operation or claims under the interpre-

tation of what Congress intended to grant to the states by

the Submerged Tidelands Act and the interpretation of the

State’s statutes defining the boundaries of the State of Cal-

ifornia. Additionally, the state in those cases was a party

claiming broader statutory territory than the existing statutes

clearly described. No such conflict is present here. The state

claims no territory or jurisdiction to control what occurs in

or over the high seas per se. The state here has simply

legitimately imposed a use tax not upon an interstate com-

sili ta.

mercial activity but on the property or use thereof by a local

corporation doing an entirely local business out of one local

point in California where it has its principal place of busi-

ness. San Pedro, and where that business involves no more

than going to another point within the same county and

state.

The authority and right to impose a tax free from the

claim that by definition the activity is interstate commerce,

is amply supported by Wilmington Transportation Company

v. Railroad Commission of California, supra, 236 U.S.

151, and other cases rejecting the defense of interstate com-

merce. (Alaska v. Arctic Maid (1961) 366 U.S. 199.)

Respondent also relies upon United Air Lines v. Public

Utilities Commission of Cal. (1952) 109 F. Supp. 13 (S.D.

Cal.). The federal trial court held that flights between Los

Angeles International Airport and Santa Catalina Island

were within the jurisdiction of the Federal Civil Aeronautics

Board because the flights were over the high seas. The state

claimed the right to regulate flights by requiring compliance

with its local regulations. Respondent asserts that'the case

was reversed by the Supreme Court on “‘procedural grounds.”’

Irrespective of respondent’s characterization, the entire case

was reversed in 346 U.S. 402, in its entirety. Thus there

is no authority that transporting passengers by air from San

Pedro to Catalina Island is interstate commerce which

thereby insulates that activity from control by the State of

California.

In addition to the ‘‘high seas’’ argument, respondent

claims that some of its passengers are passengers in interstate

or foreign commerce. This is based on the stipulation that

a minority of the total passengers on a minority of voyages

were parts of group package tours paid for and operated by

out-of-state travel agents. This argument may be dismissed

as de minimis. In a suit for tax refund the burden of proof

pom Ye

rests upon the party seeking the refund. He must show not

only that the tax assessment was in error but also prove

sufficient facts upon which a correct assessment can be

made. (People v. Schwartz (1947) 31 Cal. 2d 59, 64-66;

Sunshine Art Studios of California, Inc. v. State Bd. of

Equalization (1974) 39 Cal. App. 3d 223, 230-231.) In

order to qualify for the claimed exemption of section 3638,

it was respondent’s burden to prove that the principal use

of the watercraft was transportation for hire in interstate or

foreign commerce. A minority of the passengers on the

minority of the trips (whatever that may mean), does not

prove that the principal use of the vessel was in interstate

commerce or that a principal use was in transporting such

types of passengers. (Union Oil Co. v. State Bd. of Equal.

(1963) 60 Cal. 2d 441, 456-457.) To the contrary, it infers

that on infrequent occasions some few passengers were

sightseers or tourists from out of state. There is no proof

of any interstate tourist business or negotiations therefor

conducted by respondent. Neither is there any proof that

respondent served as some sort of connecting passenger

carrier between two interstate carriers. Admittedly, ‘‘there

is no single concept of interstate commerce . . .”’ (McLeod

v. Threlkeld, supra, 319 U.S. 491, 495.) Also, we recognize

that almost any local activity which may have only a remote

and tenuous relationship with travel or other interstate com-

mercercan be said to affect interstate commerce, thus en-

abling Congress to regulate it in order to promote some

publicly accepted and judicially recognized interest (e.g.

see Wickard v. Filburn (1942) 317 U.S. 111.) But neither

Congress nor the state have so classified respondent’s ac-

tivity. Until and unless Congress or the state so declare, the

out-of-state tourists status of some few of its passengers

does not truly change the local intrastate character of respon-

dent’s activity.

In summary, the respondent was not doing a business in

interstate commerce among the several states or between

one state and other or passing through waters of another

state or foreign nation. It was not carrying on any substantial

part of any interstate travel. Apart from making a claim that

it was plying its trade upon the high seas, respondent cannot

demonstrate that its activity was genuinely and substantially

engaged in interstate or foreign commerce. Admittedly, the

absence of congressional control does not necessarily prove

the activity is not interstate commerce. On the other hand,

as in the case at bench, the lack of any evidence of any

federal regulation or control, and the lack of any evidence

that the imposition of the sales and use tax in any way

conflicts with any federal rule or regulation governing the

activity of respondent, and the lack of any evidence that the

activity in fact interferes with or substantially affects directly

or indirectly the commerce of some sister state or foreign

state or foreign nation, all strengthen the conclusion that

respondent is not engaged in interstate or foreign commerce.

The judgment is reversed and the cause remanded to the

superior court with instructions to enter judgment for ap-

pellant.

NOT FOR PUBLICATION.

/s/ BEACH

BEACH, J.

We concur:

/s/ FLEMING

FLEMING, Acting P. J.

/s/ COMPTON

Compton, J.

inde aa

Stipulation of Facts.

Superior Court of the State of California for the County

of Los Angeles.

M.G.R.S., Inc., a California corporation, Plaintiff, vs.

California State Board of Equalization, Defendant. No. C

96419.

IT IS HEREBY STIPULATED by and between plaintiff

M.G.R.S., Inc., a California corporation (hereinafter called

‘*MGRS’’) and defendant California State Board of Equal-

ization (hereinafter called **Board’’), through their respec-

tive counsel, that for the purposes of the herein action the

following statements are true and undisputed, although not

necessarily relevant, and may be treated by the Court as

facts proven in open court.

1. At all times herein mentioned, MGRS was and is

now a corporation duly organized and existing under and

by virtue of the laws of the State of California, with its

principal place of business in the County of Los Angeles.

2. The Board is a duly constituted agency of the State

of California charged with the administration of the Sales

and Use Tax Law.

3. The California Attorney General has an office in the

City of Los Angeles, County of Los Angeles, State of Cal-

ifornia.

4. The amount in controversy between MGRS and the

Board concerns the period January |, 1963 through Decem-

ber 31, 1970 (hereinafter called ‘‘audit period’’) to which

all unspecified time references relate.

5. At all times mentioned herein, plaintiff was engaged

in the transportation of passengers and their baggage for

hire by vessel between the Port of the City of Los Angeles

and the harbor of the City of Avalon on Santa Catalina

Island pursuant solely to authority granted by the California

wer es

Public Utilities Commission in Decision 59710 in Appli-

cation 41589, dated February 23, 1960, as subsequently

amended.

6. The duration of the one-way voyage between the two

points was approximately two hours and covered a distance

of 26 miles. No United States mail, interstate freight on

through bills of lading, nor interline (pursuant to joint and

through arrangements between MGRS and other carriers)

passengers were carried on the S.S. Catalina by MGRS.

Some of the passengers transported were part of group pack-

age tours arranged, paid for and operated by out-of-state

travel agents. These tours originated in the following lo-

cations, among others: Vancouver, British Columbia; New

York City; Flagstaff, Arizona; Sonora, Mexico; Provo,

Utah; Boston, Massachusetts; Las Vegas, Nevada; Albu-

querque, New Mexico; Salt Lake City, Utah; Little Rock,

Arkansas; Oceanside, New York; Houston, Texas. The pas-

sengers on such out-of-state package tours represent a mi-

nority of total passengers on a minority of voyages.

7. Atall times mentioned herein, MGRS leased the S.S.

Catalina, a watercraft, from the Catalina Transportation

Co., a California corporation, under a bareboat charter

agreement whereby MGRS was responsible for the purchase.

of parts and materials and for the repair and maintenance

of the vessel. During the audit period MGRS made regular

lease payments to Catalina Transportation Co. and pur-

chased tangible personal property which became a com-

ponent part of such watercraft in the course of further con-

struction, repairing, cleaning, altering or improving the

vessel, and paid charges for labor and services rendered in

respect thereto. Such tangible personal property included,

among other things, paint, valves, springs, ropes and bulk-

heads.

we

8. During the audit period MGRS did not have a permit

from nor an account number with the Board and made no

payments under the provisions of the Sales and Use Tax

Law with respect to either the bareboat charter lease pay-

ments or for the purchase of parts and materials in the repair

and maintenance of the vessel, or for charges for labor or

services rendered in respect thereto. MGRS purchased the

tangible personal property ex-tax by furnishing its vendors

with a watercraft exemption certificate at the time of sale.

9. On January 14, 1971, the Board issued to MGRS a

report of a field audit covering the audit period. The report

was based upon a review of the books and records of MGRS,

including the general ledger, books of original entry, cash

receipts and disbursements journal, purchase invoices and

the lease agreements between MGRS and Catalina Trans-

portation Co. The Board administratively determined that

the operation of the S.S. Catalina by MGRS did not come

within the exemption qualifying provisions of Revenue and

Taxation Code Sections 6368 and 6368.1, and thus a tax

was assessed measured by the bareboat charter lease pay-

ments in the amount of $274,847 and the cost of tangible

personal property which became a component part of the

S.S. Catalina in the course of repairing, cleaning, altering,

and improving the same, and charges made for labor and

services rendered in respect to such repairing, cleaning,

altering, or improving, in the amount of $191,804.

10. On March 4, 1971, the Board issued to MGRS a

notice of determination covering the audit period, a copy

of which is attached hereto as Exhibit A and incorporated

herein by reference.

11. On March 10, 1971, MGRS filed with the Board

a petition for redetermination on the ground that the oper-

ation of the S.S. Catalina came within the exemption pro-

wee Sa

visions of Revenue and Taxation Code Sections 6368 and

6368.1.

12. On March 9, 1972, a preliminary hearing on the

petition was held before Board Hearing Officer Robert H.

Anderson. On September 25, 1973, a formal hearing on the

petition was held before the Board en banc.

13. On December 28, 1973, the Board issued to MGRS

a notice of redetermination, a copy of which is attached

hereto as Exhibit B and incorporated herein by reference.

14. On January 25, 1974, MGRS timely paid under

protest to the Board the amount of $30,916.73 set forth in

the notice of redetermination.

15. On March 15, 1974, MGRS timely filed with the

Board under the provisions of Revenue and Taxation Code

Section 6902 a claim for refund of the amount paid. It

requested that the penalty portion of the assessment ($2,-

104.69) for failure to file tax returns be waived under Sec-

tion 6592 and refunded on the ground that it was advised

by its counsel and believed that it was exempt from the tax

under Sections 6368 and 6368.1.

16. On May 1, 1974, the Board denied the claim for

refund of MGRS in the amount of $28,812.04 and waived

the penalty in the amount of $2,104.69. On June 21, 1974,

the Board refunded the penalty to MGRS.

17. On August 8, 1974, MGRS timely filed this action

pursuant to Revenue and Taxation Code Section 6933.

18. If the Court determines that the use of the S.S.

Catalina by MGRS is ‘‘in interstate or foreign commerce”’

as those words are used in Revenue and Taxation Code

Sections 6368 and 6368.1, MGRS is entitled to a refund

in the amount of $28,812.04 plus interest thereon from

January 25, 1974, as provided by Revenue and Taxation

Code Section 6936. If the Court determines that the use of

pee” ator

the S.S. Catalina by MGRS is not “‘in interstate or foreign

commerce’’ as those words are used in Sections 6368 and

6368.1, MGRS is entitled to no amount of refund.

DATED: February .... , 1978.

EVELLE J. YOUNGER, Attorney General,

PHILIP C. GRIFFIN,

RODNEY LILYQUIST, JR.,

LAWRENCE KETHE,

Deputy Attorneys General,

By LAWRENCE KETHE,

Attorneys for Defendant,

California State Board of

Equalization.

DATED: February 8, 1978.

/s/ JAMES H. LYONS

JAMES H. LYONS,

Attorney for Plaintiff

M.G.R.S., Inc.

——

en

STATE BOARD OF FQUALIZATICN

DEPARTMENI OF BUSINESS TA> °3

P. O. BOX 1799

SACRAMENTO, CALIFC 2NIA 95803

MeGeR.SerINCe

2e.30X 511

SEN PEDRO

|

|

CA 90733

. ear

MARCH

~ *ANOTICE OF DETERMI

ne

CFETCTIVE DATE

401971

Day

———

PA

OF PAYAENT

YEAR

IN REPLY REFER 1O.

ACCOUNI NUMBER

sit au | pte991

NATION@®

' YOU ARE HEREDY NOTIFIED OF 4N AMOUNT 2:

“i | TAX» INTEREST ANDO PENALTY bUE FROY YOu

PURSUANT TQ TRE SALES AWQ USE TAX Law A‘!

WHERE APPLICAPLE, STATE-ADMINISTERED LOC.

SALES ANO USE TAX AND CISTRICT TRANSASTI:

(SALES) ANO USE TAX URDINAMCES,

AMOUNT

TAK a eee TOTAL

AS PETERMINEN. :

01/01/93-12/31/79 212046.935 4187.27 2104,69 —277335"9°

L-2245 868-0114

TOTAL 212045.935 4187.27 2134%,69 272339,9°

#eeepAY THIS AMOUNT 27733809:

103.23 Wtkl ACCRUE IF NOT PAID BEFGRE %4/01/7°

2104.70 IF NUT PAIN BY 04/03/71

”

PENALTY GF 19% KAS REEN ADDED FOR FAILURE Tr FILE RETURN(S),

MONTHLY INTEREST OF

ADDITIONAL PENALTY OF

LIABILITY GISCLOSeED AY AUDIT,

INFORMATION CONCERNING TAX DETERMINATIONS

ANY PERSON AGAINST WHOM A DETERMINATION IS MADE OR AitY PERSON r IRECTLY

INTERESTEG MAY PETITION FOR REDETERMINATION, TS BE TINELYs A PETITION “UST

BE OJRECTED TO THE STATE ADARD OF EQUALIZATION WITHIN 30 DAYS IMMEDIATELY

FCLLGWING THE DATE SHOWN AT THE TOP OF THIS NOTICE,

_ & PETITION NEED “OT RE IN ANY SPECIAL FIRM BUT MUST BE IN WRITING AND

MUST STATE TKE SPECIFIC GRUUNDS UPON WHICH IT IS FOUNDED,

IF A HEARING IS DESIRED, IT SHIULO BE REQUESTED IN THE PETITION. THE

PECUEST SHOULD SPECIFY WHETHER 4N INFORMAL MEETING WITH A HEARING OFFICER

AT THE NEAREST DISTRICT OFFICE OR A HEARING SEFSRE THE BQARD IN SACRAME*'TO

He DESIRED, & 10 DAY NUTICEe OF THE TIME ANJ PLACE OF HEARING WILL BE

IVEN,

PROMPT PAYMENT NF UNDISPUTED PURTIUNS TF THE LIABILITY SHOULD RE MADE,

THIS WILL PREVENT ACCRUAL OF ADDITIONAL INTEREST THEREON OND WILL NOT IN

ANY WAY AFFECT THE PROTESTED PORTIONS,

| ALUUUINIi NG DEPT.

- RECEIVED NAR - 5 i971

PLEASE RETURN THIS COPY WITH YOUR PAYMENT Exhibit A

iav-isem.y. atls-on >= ( ‘ Pe mens Epa Bain aEae:

: aia ‘ City Jes

STATE BOARD (iF EQUALIZATIO’ | EFFECTIVE GATE OF DAYMENT

DEPARTMENT OF BUSINESS TAX! 5 ia say Hae |

P.O. BOX 1799 SACRAMENTO, CALIFORNIA 95808 ais 3", ~

IN REPLY REFER TO; ,

ACCOUNT NUMRER |

4.0.R.S. Ina, . DATE: December 28, 1973

P,0, Box 511 Sul Ai | 01-0916

San Podro, CA 90733

NOTICS OF RBDETERMINATICN

You aca hereby notified that the action

indicated below was taken on your petiticn

for redstermination of Salvs and Use Tax,

AMOUNT ch |

TAX | INTEREST | PENALTY = | TOTAL

As Determined ,

A-1-53 to 12-31-70 21,046.95 4,187.27 2,104.69 27,333.91

Adjustment | 3.577232 3,577.32

As Redetermined 21,046.95 7,765.09 2,104.69 30,416.73

Monthly interest of 105,23 will accrus 1f not pald befora 21-74

Additional penalty cf 2,104.70 1£ not pald by 1-27-74

The Board concluded that the movement of passengers ond property by vessel

from the California mainland to Janta Catalina Ialand end vice versa is not

interstate oc foreign commerce within the neaning of the term as uscd ln

Secticns 6368 and 6363.1 of the Revenue and Taxation Code,

cos Janes H. Lyons

611 West Ota Street

Suite

Los Angsles, CA 90017

DUPLICATE - FOR YOUR FILES Exhibit B