California Logistics, Inc. v. State

• Decision Date: 25 March 2008
• Docket Number: No. A116649.,A116649.
• Citation: 161 Cal.App.4th 242,73 Cal.Rptr.3d 825
• Court: California Court of Appeals Court of Appeals
• Parties: CALIFORNIA LOGISTICS, INC., Plaintiff and Appellant, v. STATE of California, Defendant and Respondent.

73 Cal.Rptr.3d 825

161 Cal.App.4th 242

CALIFORNIA LOGISTICS, INC., Plaintiff and Appellant, v. STATE of California, Defendant and Respondent.

No. A116649.

Court of Appeal, First District, Division 5.

March 25, 2008.

Paul B. Justi, Esq., Law Offices of Paul B. Justi, for Plaintiff and Appellant.

Edmund G. Brown, Jr., Esq., Paul D. Gifford, Esq., Attorney General of the State of California, for Respondent.

STEVENS, J.^*

California Logistics, Inc. appeals from a judgment of dismissal entered after the trial court sustained without leave to amend the State of California's demurrer to plaintiffs amended complaint. California Logistics filed the action in response to a determination by the State's Employment Development Department that delivery drivers used by the company are employees rather than independent contractors, which determination results in additional tax liability for the company. Appellant sought a declaratory judgment and injunctive relief establishing that its drivers are independent contractors. The trial court ruled the action was barred because, under section 32 of article XIII of the California Constitution ("section 32"), the company was obligated to first pay any taxes assessed by the state before its claim could be heard by the court. Appellant maintains that section 32, known as the "pay first, litigate later" rule, does not apply because it has been determined in prior proceedings that its drivers are independent contractors, and the State is collaterally estopped from claiming otherwise. We conclude that section 32 takes precedence over the collateral estoppel doctrine and affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Because this matter was resolved at the pleading stage of the litigation by way of demurrer, the following summary of the facts is derived from the allegations set forth in California Logistics' first amended complaint. (See Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)

Appellant California Logistics is a California corporation engaged in the business of arranging delivery services for its clients. The company filed an amended complaint in June 2006 alleging that the drivers who perform the deliveries for its clients are independent contractors rather than employees". The State of California, through various administrative agencies, has unsuccessfully attempted to challenge the independent contractor status of the drivers in administrative and judicial proceedings.¹ The company's current business practices are identical to those at issue in the previous adjudications.

Despite the State's-failure to prevail in these prior proceedings, the State's Employment Development Department (EDD) contacted California Logistics, again asserting that the company's drivers are employees. According to California Logistics, the EDD threatened to relitigate the independent contractor issue "as many times as it wanted to." The EDD sent California Logistics a "Proposed Notice of Assessment" in the amount of $1,287,898.90. That total includes amounts for unemployment insurance, personal income taxes that should have been withheld from the drivers' wages, and other taxes. California Logistics alleged that it cannot afford to pay the proposed assessment amount and, were it required to pay that amount, prior to challenging the EDD's employee status determination in the courts, the company would effectively be denied access to judicial review.

In the first cause of action, California Logistics sought a declaration that the State is bound by the prior adjudications that its drivers are independent contractors. The second cause of action sought injunctive relief barring the State from redetermining this issue.

The State filed a demurrer to the first amended complaint and the trial court sustained the demurrer without leave to amend. The court concluded that it lacked jurisdiction under the "pay first, litigate later" rule because the suit constituted an attempt to enjoin the collection of a tax. It also concluded that California Logistics had failed to exhaust the administrative remedies.² A judgment of dismissal was entered in favor of the State.

DISCUSSION

California Logistics maintains the trial court erred in sustaining the State's demurrer because the State is collaterally estopped from contending that the company's drivers are employees.

Because the function of a demurrer is to test the sufficiency of a pleading as a matter of law, we apply the de novo standard of review in an appeal following the sustaining of a demurrer without leave to amend. (Holiday Matinee, Inc. v. Rambus, Inc. (2004) 118 Cal.App.4th 1413, 1420, 13 Cal.Rptr.3d 766.) We assume the truth of the allegations in the complaint, but do not assume the truth of contentions, deductions, or conclusions of law. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967, 9 Cal.Rptr.2d 92, 831 P.2d 317.) It is error for the trial court to sustain a demurrer if the plaintiff has stated a cause of action under any possible legal theory, and it is an abuse of discretion for the court to sustain a demurrer without leave to amend if the plaintiff has shown there is a reasonable possibility a defect can be cured by amendment. (Ibid.)

"A taxpayer ordinarily must pay a tax before commencing a court action to challenge the collection of the tax. This rule, commonly known as `pay first, litigate later,' is well established and is based on a public policy reflected in the state Constitution, several statutes, and numerous court opinions." (County of Los Angeles v. Southern Cal. Edison Co. (2003) 112 Cal. App.4th 1108, 1116, 5 Cal.Rptr.3d 575.) Section 32 provides: "No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature." This constitutional provision establishes that "the sole legal avenue for resolving tax disputes is a post-payment refund action. A taxpayer may not go into court and obtain adjudication of the validity of a tax which is due but not yet paid. [11] The important public policy behind this constitutional provision `is to allow revenue collection to continue during litigation so that essential public services dependent on the funds are not unnecessarily interrupted.' [Citation.] `The fear that persistent interference with the collection of public revenues, for whatever reason, will destroy the effectiveness of government has been expressed in many judicial opinions.'" (State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 638-639, 217 Cal.Rptr. 238, 703 P.2d 1131.)³

It is well-established that the applicability of section 32 does not turn on whether the action at issue specifically seeks to prevent or enjoin the collection of a tax. Instead, the provision bars "not only injunctions but also a variety of prepayment judicial declarations or findings which would impede the prompt collection of a tax." (State Bd. of Equalization v. Superior Court, supra, 39 Cal.3d at p. 639, 217 Cal.Rptr. 238, 703 P.2d 1131.) The relevant issue is whether granting the relief sought would have the effect of impeding the collection of a tax. (Western Oil & Gas Assn. v. State Bd. of Equalization (1987) 44 Cal.3d 208, 213, 242 Cal.Rptr. 334, 745 P.2d 1360.)

First Aid Services, supra, 133 Cal. App.4th 1470, 35 Cal.Rptr.3d 663, is pertinent to the present case. There, an employer challenged an EDD determination that an unemployment benefits applicant was an employee, rather than an independent contractor. (Id. at p. 1475, 35 Cal. Rptr.3d 663.) The employer filed a petition for administrative mandamus seeking reversal of the determination. (Ibid.) The court held that the employer's action was barred by section 32, reasoning that "the net result of the relief prayed for in the challenged mandamus proceeding at issue here—reversal of the Board's finding that Whittaker is an employee of First Aid— would be to restrain the collection of unemployment insurance contributions allegedly owed by First Aid under the provisions of the Unemployment Insurance Code based on the employer-employee relationship the Board found exists between First Aid and Whittaker." (Id. at p. 1480, 35 Cal.Rptr.3d 663, citing Modern Barber Col. v. Cal. Emp. Stab. Com. (1948) 31 Cal.2d 720, 192 P.2d 916; see also Modern Barber at p. 723, 192 P.2d 916 ["Since the net result of the relief prayed for herein would be to restrain the collection of the tax allegedly due, the action must be treated as one having that purpose"].)⁴

Appellant does not dispute the present action is analogous to First Aid Services in that both challenge efforts by state agencies to treat an employer's workers as employees rather than as independent contractors. Neither does it dispute that the effect of the relief it seeks would be to restrain the collection of taxes, most immediately the $1.2 million proposed assessment referenced in the amended complaint, which is based on the EDD's determination that the company's drivers are employees. Thus there is no real dispute that the present action comes within the literal terms of section 32's "pay now, litigate later" rule. It is a "proceeding ... against this State ... to prevent or enjoin the collection of [a] tax." (Cal. Const., art. XIII, § 32.)

Appellant however contends First Aid Services is factually distinguishable since that case contains no claim of collateral estoppel. In its amended complaint, appellant has pled the doctrine of collateral estoppel to bar the State's further determination that the company's drivers are employees. It asserts, "Appellant has structured its business to comply with the requirements of independent contractor status, the arrangements appellant has utilized have been challenged and upheld and appellant has...