Burroughs Corp. v. State Board of Equalization

In this case we review a challenged application of the “Sales and Use Tax Law” (Rev. & Tax. Code, § 6001 et seq.) to the computer industry. Plaintiff Burroughs Corporation appeals from a judgment of the Superior Court of Sacramento County which rejected its claim for a refund of nearly $800,000 for use taxes paid in the period between July 1, 1972, and December 31, 1975. This dispute arises from Burroughs’ use of computer components, manufactured by itself, for purposes of testing other computer components which it also manufactured. Burroughs contends that since the components used for testing (referred to as captive components or captives) were ultimately refurbished and sold or leased at full price, it should not be liable for the use tax levied on its use of the components for testing. The State Board of Equalization (Board) contends that the first use of captives to test and evaluate other components coming off the assembly line constitutes a taxable intervening use of the captives. The Board alternatively contends that the captives are taxable under the primary purpose test. We hold that the primary purpose test, defined by case law and promulgated by regulation,…