City of Ont. v. Cal. Dep't of Tax & Fee Admin.

Citation15 Cal.App.5th 237
Decision Date12 September 2017
Docket NumberA147642.
Parties CITY OF ONTARIO et al., Real Parties in Interest and Appellants. CITY OF FONTANA et al., Plaintiffs and Appellants, v. CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION, Defendant and Appellant
CourtCalifornia Court of Appeals Court of Appeals

Wendel, Rosen, Black & Dean, Leslie Allen Hausrath , and Kevin R. Brodehl for Plaintiffs and Appellants.

Kamala D. Harris , Attorney General, Diane S. Shaw , Assistant Attorney General, Anne Michelle Burr and Heather Brae Hoesterey , Deputy Attorneys General, for Defendant and Appellant.

Holland & Knight, Charles L. Coleman III , and David I. Holtzman for Real Parties in Interest and Appellants.



If a municipality imposes a sales tax, the Board of Equalization (Board or BOE) has the statutory authority to collect and then remit the tax back to the municipality. But what if more than one municipality claim that the taxable sale occurred within its jurisdiction? Included in the Board's authority is the power to determine where sales of personal property occur, and the correlative power to designate the municipality that will receive any local sales tax that is being collected by the Board. Here, following an internal reorganization of an existing seller, the Board decided that local sales tax which had been remitted to cities A and B would be "reallocated" to city C. The trial court set aside this decision, issuing a writ of administrative mandamus directing the Board to reconsider the issue.

No one is satisfied with the trial court's action, and thus we have four appellants: (1) the Board, contending that the trial court should have left the Board's decision intact had it — the trial court — applied the correct standard of review and deferred to the Board's administrative expertise; (2) city C, essentially in agreement with the Board, contending that it should be confirmed as the sole recipient of the sales tax, and the Board's decision reinstated; and (3) and (4) cities A and B, in essence contending that the Board's erroneous reasoning is sufficiently clear that they should be restored as the proper recipients of the sales tax as a matter of law. Cities A and B also contend they are entitled to more than the Board awarded, namely, to "full retroactive allocation."

We agree with the Board. Although there are substantial questions about the trial court's approach, and its substantive analysis, they prove immaterial to our review, because the issue before this court is identical to the one before the trial court, namely, whether there is substantial evidence in the administrative record to support the Board's decision. And on our independent examination of the administrative record, we have no difficulty in concluding that there is. We further conclude that the manner in which the Board determined where the taxable event occurred was well within its administrative expertise and its discretionary authority to make such a determination. In light of these conclusions, we reverse and direct the trial court to enter judgment in favor of the Board. Moreover, because we conclude that cities A and B were not entitled to any relief, we summarily reject their claim they should be given more relief.

The Statutory Framework

California has had a state sales tax since 1933. (Stats. 1933, ch. 1020, p. 2599; Rev. & Tax. Code,1 § 6001 et seq., especially § 6051.) Subsequent enactment of the Bradley-Burns Uniform Local Sales and Use Tax Law (Stats. 1955, ch. 1311, p. 2381; § 7200 et seq.) permits counties and municipalities to adopt their own sales taxes. (§§ 7201, 7202, 7202.5.) The Board is statutorily responsible for the "administration" of state and local sales taxes, most particularly the collection and return of local sales tax collections to the taxing locality. (§§ 7051-7060, 7202, subd. (d); see § 7204.) At issue here is how the Board determines which local government is to be the recipient of local sales taxes.

(1) The sales tax is imposed "for the privilege of selling tangible personal property at retail," and is calculated as a percentage of "the gross receipts of the retailer from the sale of all tangible personal property sold by that person at retail." (§ 7202, subd. (a); see § 6051 [same for state tax].) As we explained recently: "The sales tax is imposed on retailers.... `The retailer is the taxpayer, not the consumer.' [Citation.] The central principle of the sales tax is that retail sellers are subject to a tax on their `gross receipts' derived from retail `sale' of tangible personal property.[2] (§ 6051.) The term `sale' means `[a]ny transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration.' (§ 6006, subd. (a).)"3 (City of South San Francisco v. Board of Equalization (2014) 232 Cal.App.4th 707, 713 (City of South San Francisco); see § 6010, subd. (a) ["transfer of title or possession" also in definition of "purchase"].) And "[f]or the purpose of a [local] sales tax ..., all retail sales are consummated at the place of business of the retailer."4 (§ 7205, subd. (a); see Cal. Code Regs., tit. 18, § 1802.)

When last we visited the subject, we concluded that as state law did not address "when transfer of title occurs," the Board did not exceed its authority "by using section 2401, subdivision (2), of the California Uniform Commercial Code to determine that issue." (City of South San Francisco, supra, 232 Cal.App.4th 707, 728.) The cited statute provides: "Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place; and in particular and despite any reservation of a security interest by the bill of lading. [¶] (a) If the contract requires or authorizes the seller to send the goods to the buyer but does not require him to deliver them at destination, title passes to the buyer at the time and place of shipment; but [¶] (b) If the contract requires delivery at destination, title passes on tender there." (Cal. U. Com. Code, § 2401, subd. (2).)

The concept of transfer of title, particularly where and when it occurs, is central to this controversy.

The Taxpayer's Operations

Up to January 1, 2006, Medline Industries, Inc. (Medline), a privately held Illinois corporation, shipped its retail health care products to Medline-owned warehouses in the City of Fontana (in San Bernardino County), and the City of Lathrop (in San Joaquin County), which Medline products were then distributed to purchasers from these locations. The shipping was done by Medline Industries Holdings, LP (Medline Holdings), which, according to Medline's senior tax officer, "owns the entire inventory of Medline and Affiliated Subsidiaries in every state, including California." The actual delivery was done by another wholly owned subsidiary, MedTrans LLC (MedTrans).5 Medline Holdings also owns the warehouses. Fontana and Lathrop received the amounts collected by the Board for those taxable sales.

Medline's practices changed by the start of 2006. In August of 2005, an existing wholly owned subsidiary, MedCal Sales, LLC (MedCal), began marketing Medline products from a facility located in the City of Ontario (in San Bernardino County), a building subleased by Medline to MedCal. This building is MedCal's sole facility in California. The shift in operations was the direct result of the "Location Agreement" MedCal executed with the Ontario Redevelopment Agency6 whereby, in exchange for establishing a retail facility in Ontario, 50 percent of the sales tax paid by MedCal would be reimbursed by the redevelopment agency.7 Only a handful of MedCal employees actually work there. But more than 200 MedCal sales representatives, who are not employed or paid by Medline, are "assigned" to Ontario, and work out of that facility.

The MedCal executive who described himself in his declaration as "responsible for the ... Ontario sales office" described how those orders are generated: "MedCal sells medical supplies and equipment primarily to hospitals, nursing homes, surgery centers, doctors and other healthcare providers.... [¶] ... [¶] MedCal sells sophisticated medical equipment and supplies that often times require special training. MedCal's accounts require a sales rep to visit, call, instruct, advise, suggest, explain and train on product usage.... Over 97% of [Medline's, MedCal's, and Medline Holdings's] sales" "are generated through the direct participation of a sales rep.[8] After an account has been established, ... the actual sales order for a specific order can enter the fulfillment system through one of five mechanisms," all of which are electronic, and all of which are directed to the Ontario facility.

The order is reviewed at the Ontario facility. If there is no difficulty or problem with the order, it is "fulfilled" by MedTrans picking up the desired goods at a warehouse and then delivering them to the California customer. MedCal buys the goods from Medline Holdings, and pays MedTrans to deliver them. The customer is told to make payment to MedCal. In short, product distribution was still from the warehouses, but it was at the direction of Ontario, which was now the nerve center of operations. Sales zoomed, and California became one of Medline's largest and fastest growing markets.

By January 2007, Medline had sold the Fontana warehouse and relocated its operations to a new warehouse in the City of San Bernardino (in the county of the same name).

Once the Ontario facility began operations, Medline stopped reporting to the Board that sales were occurring at the warehouses. Instead, after obtaining a seller's permit from the Board (see § 6066; Cal. Code...

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