Letterman Digital Arts Ltd. v. City of S.F.

Citation59 Cal.App.5th 317,273 Cal.Rptr.3d 475
Decision Date30 December 2020
Docket NumberA156315
CourtCalifornia Court of Appeals Court of Appeals
Parties LETTERMAN DIGITAL ARTS LTD., Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO et al., Defendants and Respondents.

Silverstein & Pomerantz, Amy Silverstein, Robert Petraglia, San Francisco, John Ormonde, Adam Hooberman, for Appellant.

Dennis J. Herrera, City Attorney, Jeremy M. Goldman, Co-Chief of Appellate Litigation City Hall, for Respondents.


Letterman Digital Arts, Ltd. (Letterman), a lessee and sublessor of property in the Presidio of San Francisco (the Presidio), appeals the dismissal of its complaint against the City and County of San Francisco and Jose Cisneros, treasurer and tax collector of San Francisco (collectively, the city), to recover a refund of gross receipts taxes and business registration fees imposed on rents it received from tenants of the subleased property. Letterman contends that imposition of the tax and fee violates the tax exemption provision in section 103(c)(9) of the Presidio Trust Act.1 We conclude that the trial court properly sustained without leave to amend the city's demurrer because the tax and fee do not contravene the provisions of the federal statute.

1. Taxing Power Within the Presidio as a Federal Enclave

The Presidio, formerly a military base and now a National Park site, is located in the Golden Gate National Recreation Area in San Francisco. The Presidio is an exclusive federal enclave under the United States Constitution's Enclave Clause, article I, section 8, clause 17. California ceded the Presidio to the federal government in 1897. (Stats. 1897, ch. 56, § 1, p. 51.) California reserved only the right to serve and execute civil and criminal process.

( Standard Oil Co. v. California (1934) 291 U.S. 242, 244, 54 S.Ct. 381, 78 L.Ed. 775.) A state or local government cannot exercise its police or taxing powers in an exclusive federal enclave except to the extent the state reserves those powers at the time the land is ceded, or the federal government later permits. (See U.S. Const., art. 1, § 8, cl. 17 ; Coso Energy Developers v. County of Inyo (2004) 122 Cal.App.4th 1512, 1519–1522, 19 Cal.Rptr.3d 669 ; Sen.Rep. No. 1625, 76th Cong., 3d. Sess., p. 2 (1940).2 )

Prior to 1940 San Francisco had no authority to impose a tax of any kind in the Presidio. But in 1940 Congress enacted the Buck Act ( 4 U.S.C. §§ 105 – 110.), which authorizes states and local jurisdictions to impose income taxes on activities in federal areas, or on residents of such federal areas, to the same extent and with the same effect as though such land was not a federal area.3 For purposes of the Buck Act, "income tax" means "any tax levied on, with respect to, or measured by, net income, gross income, or gross receipts." ( 4 U.S.C. § 110(c).) The Buck Act thus empowers San Francisco to impose a tax on gross receipts earned within the Presidio.

2. The Presidio Trust Act

In enacting the Presidio Trust Act in 1996, Congress created the Presidio Trust as a wholly-owned government corporation to manage the Presidio. (§ 103(a).) Under the Presidio Trust Act, the trust must fulfill the dual statutory purposes of preserving the historic and natural character of the Presidio and its cultural and recreational resources and making the Presidio financially self-sustainable. (§ 101(5), (6), (7); see Presidio Historical Assn. v. Presidio (9th Cir. 2016) 811 F.3d 1154, 1157.) The Presidio Trust Act exempts the trust from certain federal laws and regulations. (See, e.g., § 104(b) [exempting trust from procurement requirements].) It also contains the tax exemption at issue in this case, section 103(c)(9). As originally enacted, section 103(c)(9) read, "The Trust and all properties administered by the Trust shall be exempt from all taxes and special assessments of every kind by the State of California, and its political subdivisions, including the City and County of San Francisco." ( Pub.L. No. 104–333 (Nov. 12, 1996) 110 Stat. 4093.) As a wholly-owned government corporation, legislation was not and necessary to exempt the trust itself from taxation.4 Legislation was necessary, however, to exempt taxation of privately held possessory interests. (See California State Teachers’ Retirement System v. County of Los Angeles (2013) 216 Cal.App.4th 41, 56, 156 Cal.Rptr.3d 545 [" "Privately held possessory interests in property owned by the federal government, the state, and municipalities are subject to taxation. [Citation.] Because a large proportion of California land was (and is) in public ownership, taxation of possessory interests is an important source of local government revenue." "].) In 2000, section 103(c)(9) was amended to read: "The Trust and all properties administered by the Trust and all interest created under leases, concessions, permits and other agreements associated with the properties shall be exempt from all taxes and special assessments of every kind by the State of California, and its political subdivisions, including the City and County of San Francisco." (Italics added.) The meaning of the italicized language added by the 2000 amendment is at issue in this case.5

3. The Tax and Fees at Issue and Letterman's Refund Claims

Under article 12, section 953, subdivision (a) of the San Francisco Business and Tax Regulations Code, "every person engaging in business within the City shall pay an annual gross receipts tax." The city characterizes the tax as "a privilege tax imposed upon persons engaging in business within the City for the privilege of engaging in a business or occupation in the City." (Id. , subd. (b).) In addition, the city requires that each business pay an annual registration fee, which is measured by its gross receipts. (S.F. Bus. & Tax Regs. Code, art. 12, § 855, subd. (e)(1).)

In September 2015, Letterman paid the city a business registration fee of $12,501 for July 2015 through June 2016. In February 2016, Letterman paid the city $45,001.02 ($15,199.00 for 2014 and $29,002.02 for 2015) in gross receipt taxes and $6,877.50 in further business registration fees for July 2015 through June 2016. In May 2016, Letterman paid $12,501 in business registration fees for July 2016 through June 2017. Letterman submitted claims to the city for refunds of these payments. Letterman asserted that its receipts are exempt under section 103(c)(9) "because they are rents earned by subletting real property leased from the Presidio Trust." The city denied the claims.

In February 2017, Letterman filed the operative complaint against the city for refunds of the taxes and fees it paid in the amount of $76,880.52, plus interest from the date of payment. The complaint attached copies of the claims for refund and the city's denial of the claims. Letterman asserted three causes of action based on alleged violations of the due process and commerce clauses of the United States Constitution and the Presidio Trust Act. As alleged, the trust leased property in the Presidio to Letterman, which in turn subleased the property to third parties, such as financial services businesses, investment firms, software firms, and nonprofit entities. Letterman earns rent from subleasing the property. With respect to its third cause of action for violation of the Presidio Trust Act, Letterman alleged that "[t]axing [its] receipts earned by subletting real property pursuant to the written lease with, and authorization to do business by, the Presidio Trust is taxing an interest created under a lease of property of the Presidio ..., in violation of the Presidio Trust Act."

4. The City's Demurrer and the Trial Court's Ruling

The city filed a demurrer asserting that Letterman failed to allege facts sufficient to state each cause of action. As relevant here, the city argued, and continues to maintain, that Letterman's third cause of action for violation of section 103(c)(9) fails because "[a] tax on gross receipts does not become a tax on an ‘interest’ created under a lease simply because [Letterman] earns its money from rental payments." The city claims that an "interest created under leases ... associated with the properties," as used in section 103(c)(9), refers to possessory interests, not the privilege of engaging in a business or the right to receive rent from sublessees of the property it leases from the trust. It contends further that Letterman's interpretation of section 103(c)(9) as a prohibition on the taxation of its rental income conflicts with the Buck Act.

Letterman opposed the demurrer, arguing that the phrase "all interest created under leases ... associated with the properties" in section 103(c)(9) includes the right to receive rent from subleases of the leased property. Since the exemption is from "all taxation and special assessments of every kind," Letterman claims its receipts are exempt from the city's gross receipts tax and business registration fee. Letterman argues, "there is no reason to assume Congress would not have overridden the Buck Act" and "[a]s the more recent and specific provision, the Presidio Trust Act would control."

The trial court overruled the city's demurrer as to the first cause of action and sustained it as to the second and third causes of action without leave to amend. With respect to the third cause of action, the court concluded that "San Francisco's gross receipts tax and business registration fee do not constitute taxation of [Letterman's] ‘interest’ created under a lease. (See, e.g., U.S. v. Wells Fargo Bank (1988) 485 U.S. 351, 355, 108 S.Ct. 1179, 99 L.Ed.2d 368 ; Northern Commercial Co v. Territory of Alaska (9th Cir. 1923) 289 F. 786, 787 ; Brunton v. Superior Court of Los Angeles County (1942) 20 Cal.2d 202, 207, 124 P.2d 831 ; Tin Tin Corp. v. Pacific Rim Park, LLC (2009) 170 Cal.App.4th 1220, 1228, 88 Cal.Rptr.3d 816 ; City and County of San Francisco v. Flying Dutchman Park, Inc. (2004) 122 Cal.App.4th 74, 78, 18 Cal.Rptr.3d...

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