Cal. Dep't of Tax & Fee Admin. v. Superior Court

• Decision Date: 07 May 2020
• Docket Number: B294400
• Citation: 262 Cal.Rptr.3d 397,48 Cal.App.5th 922
• Parties: CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION et al., Petitioner, v. SUPERIOR COURT, Respondent. Jeremy Daniel Kintner, Real Party in Interest.
• Court: California Court of Appeals Court of Appeals

48 Cal.App.5th 922

262 Cal.Rptr.3d 397

CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION et al., Petitioner,

v. SUPERIOR COURT, Respondent.Jeremy Daniel Kintner, Real Party in Interest.

B294400

Court of Appeal, Second District, Division 2, California.

Filed May 7, 2020

Xavier Becerra, Attorney General, Diane S. Shaw, Assistant Attorney General, Lisa W. Chao, Deputy Attorney General, Laura E. Robbins, Deputy Attorney General for Petitioner.

Mark Bernsley, Woodland Hills, for Real Party in Interest.

No appearance for Respondent.

HOFFSTADT, J.

Article XIII, section 32 of the California Constitution ( section 32 ) requires taxpayers to pay a tax before they can challenge its assessment. ( Cal. Const., art. XIII, § 32 ; Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, 1107, 171 Cal.Rptr.3d 189, 324 P.3d 50 ( Loeffler ).) Government Code section 11350 ( section 11350 ) provides that "[a]ny interested person" may sue for declaratory relief "as to the validity of any regulation." ( Gov. Code, § 11350.) Can a taxpayer avoid section 32 ’s "pay first" rule by alleging, in a claim for declaratory relief invoking section 11350, that the tax regulation giving rise to his unpaid tax assessment is invalid? We hold that the answer is "no." What is more, to the extent language in Pacific Motor Transport Co. v. State Bd. of Equalization (1972) 28 Cal.App.3d 230, 104 Cal.Rptr. 558 ( Pacific Motor ) can be read to suggest a contrary answer, we respectfully disagree with Pacific Motor . In light of our holding, we grant the writ petition challenging the trial court’s order overruling the demurrer in this case, and direct the trial court to enter a new and different order sustaining the demurrer without leave to amend.

FACTS AND PROCEDURAL BACKGROUND

I. Facts¹

Back in 2009, HK Architectural Supply, Inc. ("HK Architectural") was a closely held corporation. Jeremy Daniel Kintner (plaintiff) was an officer and shareholder in HK Architectural, and in that capacity controlled its operations.

On May 28, 2009, the California Franchise Tax Board suspended HK Architectural’s corporate status. Despite being suspended, HK Architectural continued to do business but did not pay any sales tax.

In February 2012, the Board of Equalization (the Board) assessed plaintiff for the amount of sales tax that HK Architectural owed but never remitted to the Board for the last three quarters of 2009. The Board initially assessed plaintiff $71,408 in unpaid taxes and penalties, but subsequently reduced the assessment to $67,389.53 (exclusive of interest).² The Board assessed plaintiff pursuant to (1) a 1980 "policy" of holding the "officers and shareholders controlling a closely held corporation" liable for unpaid sales tax during "any period" in which the corporation’s "powers were suspended ... for failure to pay franchise taxes" ("the Policy"), and (2) a 2000 regulation that codified the Policy ("the Regulation") ( 18 Cal. Code Reg., § 1702.6 ).

II. Procedural Background

A. Original complaint

In November 2017, plaintiff sued the Board and its successor entity, the California Department of Tax and Fee Administration (the Department).³ Plaintiff alleged three claims for declaratory relief—two seeking declarations that the Policy and the Regulation, respectively, constituted an "illegal and unconstitutional exercise of legislative power," and one seeking a declaration that the Board’s refusal to consider challenges to the Policy or Regulation during administrative proceedings violated due process. As relief, plaintiff prayed for declarations that the Policy and Regulation "may not be implemented, enforced or otherwise relied upon" and that the assessment against plaintiff "was illegal, unconstitutional and void."

The trial court granted judgment on the pleadings to the Board and the Department. Because plaintiff had not paid the sales tax he was challenging, the court reasoned, the "pay-first, litigate-second rule" set forth in the "text" of the "California Constitution" barred plaintiff’s lawsuit "challeng[ing]" the sales tax as "illegal." The dismissal was without leave to amend as to the Board (because it was largely defunct); as to the Department, however, the court granted plaintiff leave to "amend his Complaint to make it a refund action."

B. First amended complaint

1. Allegations

In June 2018, plaintiff filed a first amended complaint. Contrary to the conditions of the trial court’s grant of leave to amend, the first amended complaint was not a refund action because plaintiff had yet to pay—or file an administrative refund claim for—the vast majority of the outstanding tax assessment. Indeed, it was not until after he filed his original complaint that plaintiff paid—and filed an administrative refund claim for—just 11 percent of the assessed amount (that is, $7,450.98 of the $67,389.53 assessed tax liability).

Instead, plaintiff re-alleged two of the declaratory relief claims from his original complaint—namely, that the Policy and the Regulation were "illegal" and "unconstitutional."

Plaintiff also alleged that he had standing to bring these claims for declaratory relief due to three distinct "interests and controversies": (1) as a person against whom a tax had been assessed based on the Policy and the Regulation, (2) as a "responsible officer" of a different "closely held corporation" called JK Supply Corp. ("JK Supply"), against whom the Policy and Regulation could be applied in the future, and (3) as a "member[ ] of the public" and "citizen" of California interested in "hav[ing] all branches of government ... act within the bounds of their constitutional authority." Throughout the first amended complaint, plaintiff repeatedly cited section 11350.

As relief, plaintiff prayed for a declaration that (1) the Policy and the Regulation are "illegal" and "violate[ ] the ... Constitution," and (2) "[a]ny purported liability based on the Policy" or the Regulation "is not a ‘tax’ or liability for a ‘tax’ for purposes of the Constitution and laws of California." Plaintiff alleged that he did "not seek ... to prevent or enjoin the collection of any tax."

2. Demurrer

The Department demurred to the first amended complaint. After briefing and a hearing, the trial court overruled the demurrer. In its order, the court rejected plaintiff’s argument that the 2012 assessments were not "taxes." However, because plaintiff "omitted [from the first amended complaint] the prayer [from his original complaint] that [the Department’s] assessment against him be absolved," the court viewed plaintiff’s lawsuit as "an action to determine the validity of a particular regulation." This meant, the court continued, that plaintiff’s lawsuit was "separate from any claim related to an individual’s assessment" and "not one ‘maintained to recover the tax paid,’ " such that the pay-first rule did not apply. For support, the court cited section 11350 and Pacific Motor , supra , 28 Cal.App.3d 230, 104 Cal.Rptr. 558.

C. Writ petition

In December 2018, the Department filed a petition for a writ of mandate seeking an order overturning the trial court’s ruling. In December 2019, we issued an alternative writ of mandate ordering the trial court to enter a new order sustaining the demurrer with leave to amend "to allege payment of the tax due and a claim for refund." After the trial court declined to vacate its order, plaintiff filed a return and the Department filed a traverse.

DISCUSSION

The Department argues that the trial court erred in overruling its demurrer to plaintiff’s first amended complaint because, in its view, the two declaratory relief claims alleged in that pleading are barred by the "pay-first, litigate-later" rule embodied in section 32. As a threshold matter, plaintiff argues that we should dismiss the Department’s petition as inappropriate for writ review. We will examine the threshold issue first.

I. Propriety of Writ Review

Even though a trial court’s order overruling a demurrer is subject to review on appeal from the final judgment, an appellate court has the option to review such an order prior to final judgment through a writ of mandate. ( San Diego Gas & Electric Co. v. Superior Court (1996) 13 Cal.4th 893, 912-913, 55 Cal.Rptr.2d 724, 920 P.2d 669 ). However, writ review is appropriate only when (1) "the remedy by appeal would be inadequate" ( Powers v. City of Richmond (1995) 10 Cal.4th 85, 113, 40 Cal.Rptr.2d 839, 893 P.2d 1160 ) or (2) the writ presents a "significant issue of law" or an issue of "widespread" or "public interest" ( Brandt v. Superior Court (1985) 37 Cal.3d 813, 816, 210 Cal.Rptr. 211, 693 P.2d 796 ; Fogarty v. Superior Court (1981) 117 Cal.App.3d 316, 321, 172 Cal.Rptr. 594 ; Cryolife, Inc. v. Superior Court (2003) 110 Cal.App.4th 1145, 1151, 2 Cal.Rptr.3d 396 ). Writ review is appropriate in this case because the Department’s petition presents a significant issue of law (that is, whether a taxpayer may avoid the pay-first rule by challenging an unpaid assessment via a declaratory relief claim), and this is an issue of great public interest (because, as noted below, the pay-first rule is necessary to keep government running).

II. The Demurrer

In reviewing an order overruling a demurrer, we ask whether the operative complaint " ‘states facts sufficient to constitute a cause of action’ " ( Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126, 119 Cal.Rptr.2d 709, 45 P.3d 1171 ) and, if it does, whether that complaint nevertheless " ‘disclose[s] some defense or bar to recovery’ [citation]" ( Casterson v. Superior Court (2002) 101 Cal.App.4th 177, 183, 123 Cal.Rptr.2d 637 ). In undertaking the inquiry, we accept as true all " " "material facts properly pleaded" " " and consider any materials properly subject to judicial notice. ( Centinela Freeman , supra , 1 Cal.5th at p. 1010, 209 Cal.Rptr.3d 280, 382 P.3d 1116.) We independently review a trial court’s order overruling a demurrer ( Apple Inc. v. Superior Court (2017) 18 Cal.App.5th 222, 240, 227 Cal.Rptr.3d 8 ),...