People v. Pacific Employers Insurance

Opinion

THOMPSON, J.

Plaintiff, the State of California, acting on behalf of the State Board of Equalization, appeals from a judgment entered in an action to enforce respondent’s liability pursuant to a written contract of surety guaranteeing the payment of sales and use taxes and incidental liabilities incurred by Hadley Alhambra, Inc. We reverse the judgment with directions to enter a new judgment for appellant.

On October 21, 1960, respondent, Pacific Employers Insurance Company, executed and issued a statutory sales tax “Bond of Seller” and “Endorsement to Bond of Seller” in the sum of $5,000 as security for the payment of sales and use taxes incurred by the principal of the bond, Hadley Alhambra, Inc., doing business as Furniture City (Hadley). The bond obligates respondent to pay all amounts of sales and use taxes, including interest penalties and costs due and not paid by Hadley on transactions occurring on and after October 21, 1960. It provides: “The surety hereunder [respondent] may relieve itself from liability to the extent and in the manner set forth in the provisions of the Civil Code [Civ. Code, § 2851] governing the termination by the surety of liability under bond; provided, however, that in no event shall it be relieved from liability as respects transactions/occurring before the effective date of such termination.”

In the taxable period October 19, 1960 through December 31, 1960, Hadley underreported its sales and use tax liability on its quarterly tax return by $186.20. In the period from January 1, 1961 through March 28, 1961, Hadley filed no sales and use tax returns although it was liable for

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such taxes in the amount of $7,057.20 for that period. On April 19, 1961, respondent gave notice of cancellation of its bond. On that date, no penalties or interest resulting from unpaid sales and use tax had been assessed against Hadley.

On May 1, 1961, the State Board of Equalization (the Board) assessed a penalty of $705.72 against Hadley for failing to pay its assessment for the January 1-March 28, 1961, period. By operation of law, those penalties accrued on the last day of the month following each reporting period within that span. On December 1, 1961, the Board sent a statutory notice of determination to Hadley setting forth Hadley’s tax liability for the period October 19, 1960, to March 28, 1961. When that liability was not paid by December 31, 1961, a further penalty of $724.32 was assessed.