The animal welfare group claimed in a lawsuit filed in San Francisco Superior Court last year that poultry farms shouldn't get the tax exemption because the cages promote animal cruelty.

The lawsuit was filed against the state Board of Equalization, which administers a sales tax exemption passed by the Legislature in 2001 for farm equipment and machinery.

The cages, known as battery cages, have a floor area of 16 by 18 inches and typically contain three to 10 hens, according to the lawsuit. Humane Society attorney Peter Brandt said the cages are so cramped that the hens can't stand freely, can't turn around and can't extend their wings.

The lawsuit claimed that use of the cages violates state criminal laws forbidding the subjection of animals to "needless suffering" and requiring adequate exercise area for confined animals.

But a three-judge panel of the Court of Appeal said any alleged cruelty resulting from the cages is "one very significant step removed from governmental action."