City of S.F. v. Bd. of Equal.

• Decision Date: 18 December 2014
• Docket Number: A137173,A137186
• Citation: 232 Cal.App.4th 707,181 Cal.Rptr.3d 656
• Court: California Court of Appeals
• Parties: CITY OF SOUTH SAN FRANCISCO, Plaintiff and Appellant, v. BOARD OF EQUALIZATION, Defendant and Appellant; City of El Segundo et al., Interveners and Appellants. City of Alameda et al., Plaintiffs and Appellants, v. Board of Equalization, Defendant and Appellant; City of El Segundo et al., Interveners and Appellants.

232 Cal.App.4th 707

181 Cal.Rptr.3d 656

CITY OF SOUTH SAN FRANCISCO, Plaintiff and Appellant,

v.BOARD OF EQUALIZATION, Defendant and Appellant;

City of El Segundo et al., Interveners and Appellants.

City of Alameda et al., Plaintiffs and Appellants,

v.Board of Equalization, Defendant and Appellant;

City of El Segundo et al., Interveners and Appellants.

A137173

A137186

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

Filed December 18, 2014

Reversed and remanded.

See9 Witkin, Summary of Cal. Law (10th ed. 2005) Taxation, § 319.

San Francisco Superior Court, Hon. James Robertson, II.(San Francisco City and County Super. Ct.No. CPF-09-509231) (No. CPF-09-509234)

Pearson, Simon, Warshaw & Penny LLP, George S. Trevor, William J. Newsom, San Francisco, Holland & Knight LLP, Charles L. Coleman, III, Adanna M. Love, San Francisco, Albin C. Koch, Pasadena, Attorneys for Plaintiff and Appellant

Trombadore Gonden Law Group LLP, J. Thomas Trombadore, David M. Gonden, San Francisco, Wendel, Rosen, Black & Dean LLP, Leslie A. Hausrath, R. Zachary Wasserman, Thiele R. Dunaway, Oakland, Attorneys for Interveners

Kamala D. Harris, Attorney General of California, Paul D. Gifford, Senior Assistant Attorney General, Joyce E. Hee, Supervising Deputy Attorney General, Kristian D. Whitten, Deputy Attorney General, Karen Y.Yiu, Deputy Attorney General, Attorneys for Defendant and Appellant

Kline, P.J.

Under the State Board of Equalization's (SBE) interpretation of the Revenue and Taxation Code, all retail sales of tangible personal property stored, used, or consumed in California are subject, with limited exceptions, to either a state sales or use tax.SBE applies a state sales tax when a California business is involved in the sale and title to the property passes to the customer in California.(SeeRev. & Tax Code, §§ 6006, subd. (a); 6010.5, 6051;Cal. U. Com.Code, § 2401, subd. (2).)If these two conditions are not satisfied, the sale is subject to a use tax.(SeeRev. & Tax Code, §§ 6201,6202,6203,6401.)¹

For over 50 years SBE has interpreted the local sales and use tax law (the Bradley–Burns Uniform Local Sales and Use Tax Law(Bradley–Burns Act);§ 7200 et seq.) as being consistent with section 6001 et seq. of the California Sales and Use Tax Law(the State Tax Law).Accordingly, it subjects the retail sale of personal property to a local sales tax whenever the state sales tax applies and subjects such a sale to a local use tax whenever the state use tax applies.(SeeCal.Code Regs., tit. 18, § 1803.)²Whether SBE administers a local sales or use tax has significant consequences for cities and counties: all local sales tax revenue goes to the city where the sale was consummated while local use tax revenue is allocated to the county and distributed by the county to its cities out of a countywide pool.The city in which the sale was transacted will usually receive less revenue when a local use tax rather than a local sales tax is imposed.

Seven California cities (City Petitioners) filed for writ of mandate objecting to SBE's determination that the Bradley–Burns Act and the State Tax Law are identical when determining whether to apply a sales or use tax.Unlike SBE, City Petitioners claimed that under section 7205, subdivision (a), of the Bradley–Burns Act, all sales negotiated in a business in their city should be subject to a local sales tax—not a local use tax.Under their construction of the statutes, a local sales tax applies to all transactions consummated at a retail store in California even when the purchased item is shipped from an out-of-state warehouse to the California consumer and the transaction is therefore subject to a state use tax.The trial court agreed with City Petitioners' interpretation of section 7205, subdivision (a), but denied City Petitioners' request to have the relief apply retroactively.

This appeal presents two principal questions: Did the trial court correctly interpret section 7205, subdivision (a) and did SBE abuse its discretion by using the California Uniform Commercial Code(CUCC) to determine when title to the goods passed?We conclude SBE has been applying the law correctly.Accordingly, we reverse the portion of the judgments granting the petitions for writ of mandate.

Section 7205, enacted in 1955,⁴ was amended in 1961, 1998, and 2005.The current statute provides in relevant part: “For the purpose of a sales tax imposed by an ordinance adopted pursuant to this part, all retail sales are consummated at the place of business of the retailer unless the tangible personal property sold is delivered by the retailer or his or her agent to an out-of-state destination or to a common carrier for delivery to an out-of-state destination.”(§ 7205, subd. (a).)

In 1955, the Report on Assembly BillNo. 3111 stated that for the purposes of this bill, “all retail sales are to be presumed to have been consummated at retailer's place of business, unless property sold is delivered by retailer to out-of-state destination or to common carrier for delivery thereto.”The 1961amendment changed the provision “that all retail sales are, generally, presumptively consummated at retailer's place of business, to provision that for sales tax purposes all retail sales are so consummated.”(Assem. BillNo. 2426, Mar. 28, 1961.)SBE's Acting Secretary, Harry Say, in a letter dated June 16, 1961, to Governor Edmund G. Brown's legislative secretary explained: “Section 7205 of existing law sets forth the place of sale for purposes of local sales tax and therefore determines which city or county is entitled to the tax on a particular sale.[The amendments to section 7205] clarif[ies] the wording so that there shall be no doubt as to the place of sale.”

The revenue from a local sales tax is allocated to the city where the sale occurred.SBE allocates the revenue for a local use tax to the county where the merchandise is delivered, and distributed through a “countywide pool” to all of the jurisdictions in that county.

Facts and Proceedings Below

The relevant facts are undisputed.In the mid–1980's or early 1990's, a number of cities retained a specialist tax correction service to seek a correction and reallocation of the local sales and use taxes and they filed petitions with SBE (the mass appeal).The transactions at issue involved sales negotiated at places of business in California cities and the purchased goods were shipped from out of state directly to consumers in California.It was alleged, among other things, that a transaction did not have to be subject to the state sales tax in order for the local sales tax to be allocated directly to the place of business negotiating the sale.

In April 2001, an SBE hearing officer issued a Decision and Recommendation rejecting the mass appeal.The Decision and Recommendation stated that the local sales tax could be allocated directly to the registered place of business where the sale was negotiated only if the transaction was subject to the state sales tax.It concluded that application of the sales tax required both local participation by an office of the seller and transfer of title in California.

The Decision and Recommendation was appealed to SBE's Board Management, and the appeal was denied in January 2004.An application for a hearing before SBE's Board Members was filed in 2004.In 2010, SBE denied the petitions for reallocation of the local tax.

Meanwhile, on February 20, 2009, prior to SBE's filing its final decision on the mass appeal, the City of South San Francisco filed a petition for writ of mandate and, on the same day, the Cities of Alameda, Irvine, Newport Beach, Roseville, San Ramon, and Santa Fe Springs also filed a petition for writ of mandate.⁵The two petitions alleged that SBE had improperly distributed local sales tax revenues from transactions involving sales negotiated in these cities “and fulfilled by shipment of merchandise from out of state.”SBE's error, according to the petitions, was in treating this revenue as local “use” tax revenue, which went to the county to be distributed through a countywide pool, rather than local “sales tax” revenue, which went directly to the city where the retailer was located.SBE's treatment of the revenue was, according to the petitions, contrary to the Bradley–Burns Act.

All of the cities and counties in California received notice of the three petitions filed.The City of El Segundo(El Segundo) filed a complaint in intervention in support of the City Petitioners.The City of Alhambra(Alhambra) and just under 90 other jurisdictions intervened on the side of SBE.On April 11, 2011, the trial court granted the motions to intervene.

The two cases in this appeal and the Brisbane case, which were never consolidated in the trial court, were heard together in a bench trial.The parties stipulated to the facts.The court directed SBE to present testimony concerning the burden of applying City Petitioners' requested relief retroactively, and one witness testified on this issue.

The superior court filed its 78–page Final Statement of Decision on July 31, 2012.The court found Regulation 1803 to be invalid but it applied its ruling prospectively only.⁶The court filed its judgments on the petitions for writ of mandate on September 18, 2012.⁷

SBE and 86interveners⁸ filed timely notices of appeal from the judgments.City Petitioners and Intervener El Segundo also filed timely notices of appeal from the judgments.

DISCUSSION

I.The Issues and Standard of Review

The parties agree that the transactions at issue involve sales negotiated at a retailer in a California city and, at the time of the sale, the goods were physically located out of state and shipped directly from the out-of-state location to a consumer in California.SBE maintains that these transactions were subject to both a state and local use tax under both the State Tax Law(§ 6001 et seq.) and the Bradley–Burns Act(§ 7200...