Host Int'l, Inc. v. City of Oakland
| Decision Date | 04 October 2021 |
| Docket Number | A160692 |
| Citation | 70 Cal.App.5th 695,285 Cal.Rptr.3d 689 |
| Parties | HOST INTERNATIONAL, INC., et al., Petitioners and Appellants, v. CITY OF OAKLAND, et al. Respondents. |
| Court | California Court of Appeals Court of Appeals |
Baker & Hostetler, Michael R. Matthias and Zoe M. Steinberg, Los Angeles, for Petitioners and Appellants.
Burke, Williams & Sorenson, Kevin D. Siegel and Deepa Sharma, Oakland; Oakland City Attorney's Office, Barbara J. Parker, City Attorney, and Maria Bee, Chief Assistant City Attorney, for Respondents.
Host International, Inc. and HMSHost Corporation (collectively "Host") filed a petition for a writ of administrative mandate challenging a decision by the City of Oakland Tax Board of Review ("Board") that held it liable for $371,195.40 in business taxes, penalties, and interest based on failure to pay business tax on its subleasing activities. In this appeal from the trial court's denial of the petition, Host contends that the Board's determination that it was engaged in subleasing is unsupported by substantial evidence. Further, Host asserts that, even assuming it was engaged in subleasing, the amount of its tax liability must be reduced because subleasing constituted less than 20 percent of its receipts and the statute of limitations has run for certain years. Because we conclude Host's contentions lack merit, we affirm.
Under the Oakland Municipal Code, businesses operating in Oakland must obtain a business tax certificate and pay business license taxes each year. (Oakland Mun. Code, §§ 5.04.020, 5.04.070, 5.04.080, subd. (A).) The amount of business tax liability depends on the type of activities in which the business is engaged. (See id. , §§ 5.04.290 - 5.04.500.) A separate business tax certificate is required for each activity of the business unless the activity comprises less than 20 percent of the total gross receipts of the business. (Id. , § 5.04.040.) Thus, a business that engages in both retail sales and leasing of commercial property must obtain separate certificates for each unless the exception applies. (See id. , §§ 5.04.290, 5.04.430, subd. (A).) City of Oakland ("City") tax authorities determine the appropriate business tax classifications based on the information reported by the taxpayer. (Id. , §§ 5.04.090, subd. (A), 5.04.110, 5.04.120.)
Host held a permit approved by the Port Department of the City of Oakland ("Port") to occupy space and operate food, beverage, retail, and duty-free concessions at Oakland International Airport. In exchange for the rights granted under the permit, Host was required to pay monthly rent to the Port. In addition to authorizing retail activities at the airport, the permit authorized Host to sublease and assign its space to other parties with the consent of the Port.
The permit also required that Host comply with the Port's non-discrimination policy, as well as with United States Department of Transportation regulations concerning a federal program to ensure nondiscrimination and remove barriers to participation in airport concessions by business enterprises owned by socially or economically disadvantaged individuals. (See 49 C.F.R. § 23.1.) In addition, the permit required Host to report to the Port the gross receipts of disadvantaged business enterprises listed in Exhibit 9 to the permit. Exhibit 9 identifies several of Host's suppliers and subtenants as disadvantaged business enterprises.
Host entered into a second permit with the Port to pay rent in exchange for the ability to occupy space and conduct business at Oakland International Airport. The second permit also authorized subleasing with the consent of the Port and required compliance with nondiscrimination policies.
In 2015, based on an audit of Host's financial records, a City tax auditor determined that Host owed the City unpaid business taxes, penalties, interest, and fees for rental income from subleases between 2006 to 2015. Host had obtained a business certificate and paid business tax for its retail activities, but not for subleasing. The auditor reported that the liability calculations were based on estimates of Host's gross receipts from subleases because the "[t]axpayer did not provide requested information."
Host unsuccessfully appealed the audit results to City auditors, asserting that it was engaged only in retail sales (not commercial subleasing), that the 20 percent exception applied, and that the City could not collect some of the back taxes because of the statute of limitations. Host then appealed to the Board, which upheld the determination of tax liability in the amount of $371,195.40.
In addressing Host's arguments on appeal, "[w]e review the factual basis behind the agency's order or decision for ‘substantial evidence in ... light of the whole record.’ " ( Akella v. Regents of University of California (2021) 61 Cal.App.5th 801, 813-814, 276 Cal.Rptr.3d 250 ( Akella ); see also Code Civ. Proc., § 1094.5, subd. (c).) To the extent Host's contentions raise questions of law, we review those questions de novo. ( Akella , supra , 61 Cal.App.5th at p. 815, 276 Cal.Rptr.3d 250.) Applying these standards, we affirm the trial court's denial of Host's petition.
Host contends that the Board's conclusion that it was engaging in subleasing activity is unsupported by substantial evidence because the subleases were required by federal law and Host did not reap a profit. We conclude the Board correctly determined that Host was engaged in subleasing.
It is undisputed that Host entered into agreements to rent space to subtenants and received rent payments from them. In the administrative proceedings, Host conceded that it leased space at the airport, that it sublet some of that space to other businesses, that it collected rent from the subtenants, and that it booked this revenue as rental income. It provided a spreadsheet showing how much rent it collected from its subtenants between 2006 and 2016. These facts alone provide substantial evidence that Host engaged in subleasing.
Host argues that it should not be classified as a sublessor because it only entered into subleases to comply with federal law and the terms of its City permits. However, Host has failed to point to any provision of either federal law or the permits that mandated its subleasing activities. In a footnote, Host cites 49 Code of Federal Regulations part 23, a detailed federal regulation that has more than 30 subparts without identifying any particular provision. The rule requires recipients of federal funds to identify aspirational goals for disadvantaged businesses to participate in airport concessions, which certainly could include subleases, but it imposes no quotas and we are not aware of any sublease mandate. (See 49 C.F.R. §§ 23.25, 23.41, 23.57, 23.59, 23.61.) The permit requires Host to comply with the federal rule but does not itself require the subleases. At the Board hearing, counsel for Host conceded that "I can't point you to a legal document where it says" that Host is required to rent space to businesses owned by disadvantaged individuals.
Host also asserts that its subleasing activities were not taxable as business activity because it did not enter into the subleases for the purpose of obtaining any gain, benefit, or advantage from them. Host contends that its subleases therefore do not meet the definition of a taxable "business," which the City broadly defines as "any activity, enterprise, profession, trade, or undertaking of any nature conducted with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to another or others." (Oakland Mun. Code, § 5.04.030.) Host reasons that it only engaged in subleasing because the City made it a condition of the airport concession contract, not because Host hoped to obtain a benefit from subleasing. But even assuming Host were correct that the City made the subleases a requirement, that would simply mean that, as Host explained at the Board hearing, the subleases were part of the cost of doing business at the airport. No subleases, no airport concession contract.
Further, Host failed to place into the record any evidence demonstrating that it did not profit from subletting. Notably, the second permit expressly allowed Host to charge subtenants rent of up to 125 percent of the amount it paid to the Port for the same space. The City was unable to verify whether Host made a profit or charged a fee because Host did not cooperate with the audit.
Finally, regardless of whether Host earned a profit from subleasing, business license taxes like Oakland's are based on gross receipts – not income or profit. (See, e.g., Weekes v. City of Oakland (1978) 21 Cal.3d 386, 393-394, 146 Cal.Rptr. 558, 579 P.2d 449 ( Weekes ).) A business tax is "a tax upon the privilege of doing business within the taxing jurisdiction." ( Park ‘N Fly of San Francisco, Inc. v. City of South San Francisco (1987) 188 Cal.App.3d 1201, 1215, 234 Cal.Rptr. 23.) "[I]t is the privilege, not the income generated by its exercise, that is the direct and immediate subject of the tax." ( Weekes , supra , 21 Cal.3d at p. 397, 146 Cal.Rptr. 558, 579 P.2d 449.) Whether Host's subletting activities are profitable or not is thus irrelevant to its business tax liability.
Host also challenges the amount of its tax liability, arguing that an exception for business activity that comprises less than 20 percent of its gross receipts would eliminate its liability for the years 2006 through 2009. In addition, Host contends that a three year statute of limitations reduces its liability. We reject both arguments.
Host relies on Oakland Municipal Code section 5.04.040, which provides that a separate certificate is not required for a business activity that "produced less than twenty percent (20%) of the total gross receipts" for the business in a given year. However, to verify the applicability of this exception, the business must report...
To continue reading
Request your trial