City of Los Angeles v. Shell Oil Co.

• Decision Date: 22 February 1971
• Citation: 480 P.2d 953,4 Cal.3d 108,93 Cal.Rptr. 1
• Court: California Supreme Court
• Parties: , 480 P.2d 953 CITY OF LOS ANGELES, Plaintiff and Respondent, v. SHELL OIL COMPANY, Defendant and Appellant. L.A. 29670.

Page 1

93 Cal.Rptr. 1

4 Cal.3d 108, 480 P.2d 953

CITY OF LOS ANGELES, Plaintiff and Respondent, v. SHELL OIL COMPANY, Defendant and Appellant.

L.A. 29670.

Supreme Court of California,

In Bank.

Feb. 22, 1971.

Rehearing Denied March 26, 1971.

McCutchen, Black, Verleger & Shea, G. William Shea, Franklin H. Wilson and Frank A. Caput, Los Angeles, for defendant and appellant.

Roger Arnebergh, City Atty., Bourke Jones and James A. Doherty, Asst. City Attys., for plaintiff and respondent.

SULLIVAN, Justice.

Defendant Shell Oil Company (Shell) appeals from a judgment, entered after a nonjury trial, awarding plaintiff City of Los Angeles (the City) the sum of $57,103.27 as a deficiency of business license taxes levied against Shell by the City for the years 1958--1961.

Shell is a large oil company which operates throughout the United States. Its headquarters are in New York, and its marketing activities are carried on through a network of regional, division, and district offices.

Among the facilities maintained by Shell in Los Angeles are a 'division office' and a 'bulk terminal.' The division office is a general sales and marketing headquarters subordinate in the company hierarchy to the San Francisco 'regional office' and superior to the various 'district offices' located within the division--which includes areas outside the City itself. The bulk terminal is essentially a storage depot which is fed by pipeline from the out-of-city Wilmington refinery.

Among the functions of the division office is that of supervising wholesale sales of gasoline to retail service stations located in the districts which comprise the division. The gasoline so sold is delivered to the customer either directly from the Wilmington refinery or by truck from the Los Angeles bulk terminal. Deliveries of each kind are made to both in-city and out-of-city customers. ¹

Pursuant to the Los Angeles Municipal Code (hereafter L.A.M.C.) the City levied an assessment against Shell for unpaid business license taxes for the years 1958--1961, inclusive. After administrative hearings Shell paid a portion of the assessment and agreed to the validity of certain other portions of the City's claim relating to deliveries made to in-city customers. Remaining in controversy were, generally speaking, those portions of the alleged deficiency relating to both refinery and bulk terminal deliveries to out-of-city customers. When the Los Angeles Board of Review upheld the City's position on these matters, and Shell refused to pay the deficiency, the City commenced the present action. Judgment was entered in favor of the City, and this appeal followed.

Shell on this appeal no longer resists that portion of the alleged deficiency relating to sales of gasoline delivered from the Wilmington refinery directly to out-of-city wholesale and retail customers. Thus the only part of the assessment remaining in controversy is that relating to wholesale sales of gasoline delivered from Shell's incity bulk terminal to retailers outside the City. The City seeks to base the tax upon Shell's total gross receipts from such sales; Shell contends that the tax can be based only upon that portion of such gross receipts attributable to its selling activities within the City.

I

Preliminarily we set forth certain provisions of the Los Angeles Municipal Code applicable to the assessment here involved and a tax ruling of the City interpreting them. We also refer to pertinent decisions of this court relating to the code provisions.

L.A.M.C. section 21.03, subdivision (a), provided: '(a) Subject to the provisions of this Article, a business tax registration certificate must be obtained and a business tax must be paid by every person engaged in any of the businesses or occupations specified in Sections 21.50 to 21.198, inclusive, of this Article; and a business tax is hereby imposed in the amount prescribed in the applicable section. No person shall engage in any business or occupation subject to tax under the provisions of this Article without obtaining a registration certificate and paying the tax required thereunder.'

L.A.M.C. section 21.166 provided: '(a) Every person Manufacturing and selling any goods, wares or merchandise at Wholesale, or Selling any goods, wares or merchandise at Wholesale, and not otherwise specifically taxed by other provisions of this Article, ² shall pay for each calendar year or portion thereof the sum of $8.00 for the first $20,000 or less of gross receipts, and, in addition thereto, the sum of 40 cents per year for each additional $1,000 of gross receipts or fractional part thereof in excess of $20,000; * * * (b) For the purpose of this section, a wholesale sale or sale at wholesale means a sale of goods, wares or merchandise for the purpose of resale in the regular course of business.' (Italics added.) Effective January 1, 1960, the rate of tax was increased.

In 1954 and 1957 this court held in the Belridge cases (City of Los Angeles v. Belridge Oil Co. (1954) 42 Cal.2d 823, 271 P.2d 5, and (1957) 48 Cal.2d 320, 309 P.2d 417) that although the City could constitutionally measure its business tax as to persons engaged in 'selling' by reference to gross receipts arising from transactions having certain 'extraterritorial elements,' only those gross receipts which were 'directly attributable' to selling activities within the City could constitutionally be utilized for this purpose.

In those cases the products sold never entered the territorial limits of the City, but the main office of the defendant company was located in Los Angeles and substantial elements of its sales activity took place there. (See 42 Cal.2d at pp. 825--826, 271 P.2d 5.) It was argued on the first appeal that the City could not constitutionally base its business tax upon the gross receipts of the company because to do so would be to impose a tax on business carried on outside the City, but we concluded that the tax was based on the activity of 'selling' within the Clty and that there was 'no (constitutional) objection to basing the rate of such tax on the gross receipts attributable to such selling activities, even though various extraterritorial events contribute to such gross receipts.' (42 Cal.2d at p. 831, 271 P.2d at p. 10.)

However, we went on to express an important corollary to this principle: '(E) ven though the city can tax the activity of selling it can only base the tax on such selling activities as are carried out within its territorial limits. For this reason it is only those gross receipts which are attributable to selling activities within the city which should form the basis for the rate of tax. Gross receipts attributable to selling activities conducted outside the city, should not be included.' (42 Cal.2d at pp. 831--832, 271 P.2d at pp. 10--11.) We pointed out that if the tax were to be based upon gross receipts attributable to selling activities outside the city, 'it would unjustly discriminate against those firms whose selling activities in Los Angeles compose but a small fraction of the total sales effort and whose gross receipts are in large part attributable to selling activities in other areas.' (42 Cal.2d at p. 832, 271 P.2d at p. 11.) Thus, we concluded, 'a just and reasonable construction (of the L.A.M.C. sections in question) requires that the measure of the tax be limited to those gross receipts attributable to selling activities within the City of Los Angeles.' (42 Cal.2d at p. 833, 271 P.2d at p. 11.)

On retrial the parties in Belridge were confronted with the problem of determining which of the company's gross receipts were in fact 'attributable' to in-city selling activities within the meaning of our opinion. That the parties found this task a difficult one is manifested by the fact that they finally entered into a stipulation providing in substance that All of the defendant company's gross receipts were attributable 'in part' to its selling activities within the City and 'in part' to its selling activities without the City, but that not more than 20 percent of its gross receipts were attributable to the defendant's selling activities within the City 'under any method of allocation which is fairly calculated to determine the defendant's gross receipts derived from or attributable to sources within the City * * * and to determine the defendant's gross receipts derived from or attributable to sources outside the City * * *.' (City of Los Angeles v. Belridge Oil Co., Supra, 48 Cal.2d 320, 321, 309 P.2d 417.) The stipulation also reserved the City's right to maintain on appeal 'that there should be no allocation of receipts * * * and that the tax should be measured by defendant's total gross receipts.' (48 Cal.2d at p. 322, 309 P.2d at pp. 417--418.) The trial court held in essence that the matter of 'attribution' should be determined under a 'fair' method of allocation such as that reflected in the stipulation of the parties and that therefore the tax should be based on 20 percent of total gross receipts.

On appeal the City pressed the argument which it had reserved in the stipulation, to wit, that the first Belridge decision did not require an allocation of defendant's gross receipts but permitted taxation based on total gross receipts. In our opinion we pointed out that this argument misinterpreted the principle of the first Belridge decision by failing to give sufficient consideration to that aspect of the principle represented by what we have termed the 'corollary' thereto. In essence we reiterated that although a tax upon a 'selling' business may be measured by reference to gross receipts derived from transactions having 'extraterritorial elements,' only those gross receipts 'attributable' to incity selling activities could be considered. We concluded: 'Having heretofore held that only that portion of the gross receipts directly ³ attributable to defendant's selling activities carried on in the city of Los Angeles may be taxed...