City of Gilroy v. State Bd. of Equalization

• Decision Date: 26 July 1989
• Docket Number: No. A042074,A042074
• Citation: 212 Cal.App.3d 589,260 Cal.Rptr. 723
• Court: California Court of Appeals Court of Appeals
• Parties: CITY OF GILROY, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent; SCIENTIFIC GAMES, INC., et al., Real Parties in Interest and Respondents.

Page 723

260 Cal.Rptr. 723

212 Cal.App.3d 589

CITY OF GILROY, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent SCIENTIFIC GAMES, INC., et al., Real Parties in Interest and Respondents.

No. A042074.

Court of Appeal, First District, Division 4, California.

July 26, 1989.

Review Denied Nov. 15, 1989.

Allan J. Pinner, Russell J. Hanlon, Jeanette R. Youngblood, Berliner, Cohen &amp Biagini, San Jose, for plaintiff and appellant.

John K. Van De Kamp, Atty. Gen., Timothy G. Laddish, Supervising Deputy Atty. Gen., Julian O. Standen, Deputy Atty. Gen., San Francisco, for respondent State Board of Equalization and real party in interest and respondent California State Lottery Com'n.

Nielsen, Merksamer, Hodgson, Parrinello & Mueller, James R. Parrinello, Marguerite Mary Leoni, San Francisco, for real parties in interest and respondents Scientific Games, Inc. and Scientific Games of California, Inc.

ANDERSON, Presiding Justice.

In this opinion we resolve that the manufacturer's sale of printed tickets to the California Lottery Commission (Lottery Commission) is not exempt from state or local taxation pursuant to Government Code section 8880.68. ¹ Accordingly, the City of Gilroy is entitled to a writ of mandate compelling the State Board of Equalization (Board) to decide whether, consistent with this opinion and the resolution of certain additional defenses to taxability within the city's borders pending before the Board, to tax the manufacturer's gross receipts from the sale of printed matter to the Lottery Commission. We also hold that Gilroy lacks standing to overturn the Board's final decision on the manufacturer's successful claim for refund of some $3,729,054 in sales taxes levied on those sales.

I. BACKGROUND

A. California State Lottery Act of 1984

At the November 1984 general election, California voters approved Proposition 37, an initiative measure known as the California State Lottery Act of 1984. Proposition 37 amended the California Constitution to authorize establishment of a state lottery (Cal.Const., art. IV, § 19, subd. (d)), and added provisions to the Government Code ² which created and empowered the Lottery Commission to operate the lottery. ³

In approving the measure, the people declared that the purpose of the Act is to provide "additional monies to benefit education without the imposition of additional or increased taxes." ( § 8880.1.) Consistent with this purpose, the people expressed the intent that net revenues from the lottery "shall supplement the total amount of money allocated for public education in California." (Ibid.)

Total annual revenues from the sale of lottery tickets or shares are to be allocated as follows: (1) 50 percent to the public as prizes; (2) at least 34 percent to school districts and other public education agencies for education of students; and (3) no more than 16 percent for administrative expenses. ( § 8880.4.)

The Act authorizes the Lottery Commission to specify and establish the various lottery games ( §§ 8880.28, 8880.12); specify the number and value of prizes ( § 8880.29); set the retail price for tickets ( § 8880.31); establish methods for distributing tickets ( § 8880.33); contract with retailers to sell game tickets to the public ( § 8880.13); and specify methods for determining winners ( § 8880.30) and verifying the validity of prizes ( § 8880.32). The Act also details procedures for contracting for procurement of goods and services necessary to run the lottery ( §§ 8880.56-8880.60) and sets forth allowable costs (including costs of tickets) which comprise the 16 percent capped expenses of the lottery ( § 8880.64).

B. Bradley-Burns Law

Under authority of the Bradley-Burns Uniform Local Sales and Use Tax Law, ⁴ the Gilroy City Council has enacted an ordinance which imposes on retailers a 1 percent sales tax on the gross receipts from all retail sales of tangible personal property within the city. The Board administers the ordinance pursuant to the Bradley-Burns Law and a written agreement (the Agreement) with Gilroy to "perform exclusively all functions incident to the administration and operation of the ... ordinance." The Board carries out this mandate by collecting the 1 percent sales tax and transmitting the revenues to the city.

C. Scientific Games Contract

In June 1985, the Lottery Commission entered into a contract with Scientific Games, Inc. (Scientific Games) ⁵ for the printing of instant game tickets. An instant ticket allows the purchaser to determine immediately whether he or she has won by scratching off the coating.

The record is unclear whether tickets for the first eight games were printed in California, but at some point Scientific Games opened a plant in Gilroy to manufacture the tickets. Scientific Games was the sole printer for the initial instant ticket games. Presently the Lottery Commission contracts with another vendor as well.

The first contract between Scientific Games and the Lottery Commission was silent on the issue of sales tax and the commission paid no sales tax under that contract. Thereafter, upon inquiry of the contracting parties, the audit staff of the Board advised them that the sales transactions were subject to tax and requested Scientific Games to set up a sales and use tax account. All subsequent printing contracts between Scientific Games and the Lottery Commission have included sales tax as part of the price of the tickets, with a proviso that Scientific Games will rebate the tax in the event the Board rules that the transaction is exempt.

Scientific Games paid the assessments and filed refund claims for $3,729,054 in taxes paid through January 1987. ⁶ The Lottery Commission filed a brief supporting the refund claim, and the matter went to a preliminary hearing before a Board-appointed hearing officer. The hearing officer concluded that the section 8880.68 exemption did not apply and recommended that the Board deny the refund claim. Scientific Games petitioned for redetermination before the full Board, which unanimously voted to grant the refund on March 19, 1987. The Legislative Counsel of California later issued a legal opinion to the effect that the Board's administrative construction of section 8880.68 was reasonable.

D. Gilroy's Lawsuit

Six months later, the Board informed Gilroy of the refund decision and Gilroy's obligation to repay its share in the amount of $659,000, and that Gilroy's would lose the tax base generated by Scientific Games. The Board and the city agreed on an installment repayment plan for Gilroy's portion of the refund.

Then on December 10, 1987, Gilroy initiated the present lawsuit seeking declaratory and injunctive relief as well as a peremptory writ of mandate directing the Board (1) to collect and transmit to Gilroy all sales tax revenues due on the sale of printed matter from Scientific Games to the Lottery Commission, and (2) to set aside the refund decision. The trial court denied Gilroy's motion for peremptory writ of mandate and its application for preliminary injunction. This appeal followed; Scientific Games cross-appealed "on a precautionary basis" to the extent the trial court ruling implied that Gilroy had standing to challenge, and was not collaterally estopped from challenging, the Board's administrative decision regarding Scientific Games' refund claim. Finally, we granted a rehearing to respond to concerns raised by Scientific Games and the state agencies concerning the scope of the remedies on remand.

The trial court based its ruling solely on the finding that "sales of instant game lottery tickets to the California State Lottery Commission by [Scientific Games] have been and continue to be exempt from sales and use taxes under section 8880.68 of the Government Code." We begin our review by resolving whether section 8880.68 applies to the transactions between Scientific Games and the Lottery Commission. We then settle the standing and issue preclusion matters raised by cross-appeal. Finally, we apply our determinations to the two matters before us, namely, the denials of Gilroy's motion for writ of mandate as well as its application for preliminary injunction.

II. SECTION 8880.68

All parties agree that section 8880.68 prohibits imposition of state or local tax on the sale of lottery tickets. The dispute concerns the meaning of the term "lottery tickets," nowhere defined in the Act. The precise issue facing this court is whether the term "lottery tickets" encompasses the printed tickets manufactured by Scientific Game and sold to the Lottery Commission or whether it more narrowly refers only to the public sale of an indicia of the right to participate in a lottery game.

The Board has interpreted section 8880.68 broadly to apply to the sales in question from Scientific Games to the Lottery Commission. Because the Board is charged with enforcing and interpreting our sales and use tax laws, its administrative construction of a statutory exemption to such laws will be " 'entitled to great weight unless it is clearly erroneous or unauthorized.' " (International Business Machines v. State Bd. of Equalization (1980) 26 Cal.3d 923, 930-931, 163 Cal.Rptr. 782, 609 P.2d 1.) Thus, although we bear ultimate responsibility for construing the statute, we accord great respect to the Board's interpretation. (Id., at p. 931, fn. 7, 163 Cal.Rptr. 782, 609 P.2d 1.) ⁷

The parties urge us to begin our task by applying the "plain meaning" rule. Our Supreme Court recently summarized this rule as follows: "Words used in a statute or constitutional provision should be given the meaning they bear in ordinary use. [Citations.] If the language is clear and unambiguous there is no need for construction, nor is it necessary to resort to indicia of the intent of the ... voters...." (Lungren v. Deukmejian (1988) 45 Cal.3d 727, 735, 248 Cal.Rptr. 115, 755 P.2d 299.) Both sides also urge that if we read section 8880.68 in light of the Act's purpose...