Macy's Dept. Stores v. San Francisco

• Decision Date: 18 October 2006
• Docket Number: No. A110061.,No. A109288.,A109288.,A110061.
• Citation: 50 Cal.Rptr.3d 79,143 Cal.App.4th 1444
• Court: California Court of Appeals Court of Appeals
• Parties: MACY'S DEPARTMENT STORES, INC., et al., Plaintiffs and Respondents, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Appellant.

50 Cal.Rptr.3d 79

143 Cal.App.4th 1444

MACY'S DEPARTMENT STORES, INC., et al., Plaintiffs and Respondents, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Appellant.

No. A109288.

No. A110061.

Court of Appeal, First District, Division 3.

October 18, 2006.

Dennis J. Herrera, City Attorney, Julie Van Nostern, Chief Tax Attorney, Owen Clements, Chief of Special Litigation, Carol A. Boardman, Peter J. Keith, Deputy City Attorneys, Reed Smith, James P.

Kleier, John R. Messenger, Karen L. Snell, for Appellants.

Colantuono & Levin, Sandra J. Levin, Los Angeles, Holly O. Whatley, Los Angeles, Amy C. Sparrow, for Amicus Curiae on behalf of Appellants.

Bewley, Lassleben & Miller, Jeffrey S. Baird, Joseph A. Vinatieri, Farella, Braun & Martel, Whittier, Charles M. Sink, San Francisco, for Respondents.

SIGGINS, J.

The City and County of San Francisco (the City) appeals a judgment that awarded Macy's Department Stores, Inc. and four related corporations (Macy's) a multi-year tax refund. The City argues that (1) Macy's 1995 and 1996 refund claims were untimely, (2) the trial court erred by refunding all local business taxes paid by Macy's during the contested period instead of the amount sufficient to negate the discriminatory effect of the tax, and (3) the rate of prejudgment interest should have been derived from a local ordinance rather than state law. We conclude Macy's tax refund must be limited to an amount sufficient to cure the discriminatory effect of the tax. So, we reverse.¹

FACTUAL AND PROCEDURAL BACKGROUND

Pursuant to City ordinances in effect between 1995 and 1999, a business that operated in San Francisco was required to calculate its tax liability separately under payroll expense and gross receipts taxes, and to pay the greater of the two amounts. (S.F. Mun. Code, pt. III, former arts. 12-A & 12-B.) In April 2001, the City repealed the gross receipts tax, effective January 1, 2000.² (S.F. Ord. No. 63-01, § 1.)

On January 28, 1999, Macy's filed claims with the City for refunds of all taxes paid since 1995. Later Macy's filed refund claims for all taxes paid through the year 2000.³ The claims were denied. In September 1999, Macy's filed the first of three complaints seeking tax refunds, on the basis that the City's business tax scheme failed the internal consistency test used to determine whether a state or local tax violates the Commerce Clause of the United States Constitution. Macy's also alleged the City's tax scheme violated the corresponding provisions of the California Constitution. The cases were consolidated in March 2002.

Three experts testified in the one-day court trial. Direct testimony was provided by their written reports, and each expert was subject to cross-examination. The experts agreed the City's pre-2000 "tandem tax" could hypothetically discriminate against intercity taxpayers, who might be subject to tax under a payroll expense measure in one jurisdiction and under a gross receipts measure in another, unlike a local taxpayer, who would pay tax only to San Francisco under only one measure.⁴

Economist Steven M. Sheffrin, Ph.D., was retained by the City and described a method for quantifying the extra amount an intercity taxpayer would hypothetically be burdened under the tandem tax. This amount was argued to represent the appropriate measure of refund. Macy's expert economist, Dr. Charles E. McLure, criticized Dr. Sheffrin's approach as bad public policy because liability for a partial refund would not serve to sufficiently deter local governments from enacting invalid tax measures, but did not challenge its efficacy in this case, and conceded that the fact situation was "relatively simple." Certified Public Accountant Everett P. Harry used financial information produced by Macy's during discovery and applied Sheffrin's method to calculate the maximum excess taxes the City's scheme could have imposed on Macy's.⁵ Macy's declined to cross-examine Harry, and did not challenge his computations.

The trial court found the City's tandem tax scheme violated the federal and state Constitutions because it failed the internal consistency test. The court also concluded that General Motors Corp. v. City and County of San Francisco (1999) 69 Cal.App.4th 448, 81 Cal.Rptr.2d 544 compelled a full refund of all taxes paid by Macy's from 1995 through 1999, that Macy's refund claims for tax years 1995 and 1996 were timely, and that pre-judgment interest should be set at seven percent, accruing from the date of each tax payment.⁶ The City timely appealed.⁷

DISCUSSION

A. Measure of Refund

In Container Corp. v. Franchise Tax Bd. (1983) 463 U.S. 159, 169-170, 103 S.Ct. 2933, 77 L.Ed.2d 545, the United States Supreme Court first articulated what has become known as the "internal consistency" test that measures the validity of a state or local tax argued to have a negative impact upon interstate commerce and thereby violate the dormant Commerce Clause. "Internal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear. This test asks nothing about the degree of economic reality reflected by the tax, but simply looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate. A failure of internal consistency shows as a matter of law that a State is attempting to take more than its fair share of taxes from the interstate transaction, since allowing such a tax in one State would place interstate commerce at the mercy of those remaining States that might impose an identical tax." (Oklahoma Tax Comm'n v. Jefferson Lines, Inc. (1995) 514 U.S. 175, 185, 115 S.Ct. 1331, 131 L.Ed.2d 261.)

The internal consistency test has since been applied by California courts to determine the validity of local tax measures challenged as discriminatory in violation of the Commerce Clause of the United States Constitution and "the equivalent proscriptions derived from provisions of the California Constitution."⁸ (General Motors Corp. v. City of Los Angeles (1995) 35 Cal.App.4th 1736, 1752, 42 Cal.Rptr.2d 430; see also Union Oil Co. v. City of Los Angeles (2000) 79 Cal.App.4th 383, 389-390, 392, 94 Cal.Rptr.2d 81.)

When a tax fails because it is not internally consistent, the United States Supreme Court has generally left it up to the states to determine the exact remedy they must provide to aggrieved taxpayers. (See, e.g., Tyler Pipe Industries v. Dept. of Revenue (1987) 483 U.S. 232, 252-253, 107 S.Ct. 2810, 97 L.Ed.2d 199.) The parameters of state-afforded relief were made clear in McKesson Corp. v. Florida Alcohol & Tobacco Div. (1990) 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (McKesson), where the Supreme Court held: "To satisfy the requirements of the Due Process Clause, ... the State must provide taxpayers with, not only a fair opportunity to challenge the accuracy and legal validity of their tax obligation, but also a `clear and certain remedy,' [citation], for any erroneous or unlawful tax collection to ensure that the opportunity to contest the tax is a meaningful one." (Id. at p. 39, 110 S.Ct. 2238, fn. omitted.) The court concluded that when a tax scheme is found unconstitutional "only insofar as it operated in a manner that discriminated against interstate commerce," the taxing authority "retains flexibility in responding to this determination," and may "reformulate and enforce the [tax] during the contested tax period in any way that treats [the taxpayer] and its competitors in a manner consistent with the dictates of the Commerce Clause. Having done so, the [taxing authority] may retain the tax appropriately levied upon [the taxpayer] pursuant to this reformulated scheme because this retention would deprive [the taxpayer] of its property pursuant to a tax scheme that is valid under the Commerce Clause." (Id. at pp. 39-40, 110 S.Ct. 2238.) "More specifically, the [taxing authority] may cure the invalidity of the [tax] by refunding to [the taxpayer] the difference between the tax it paid and the tax it would have been assessed were it extended the same [preferential treatment] that its competitors actually received."⁹ (Id. at p. 40, 110 S.Ct 2238; accord, Fulton Corp. v. Faulkner (1996) 516 U.S. 325, 346-347, 116 S.Ct. 848, 133 L.Ed.2d 796.)

Here, the City does not appeal the trial court's determination that the tandem payroll and gross receipts tax scheme fails the internal consistency test, and is therefore unconstitutional. Instead, the City appeals the award to Macy's of a full refund of all business taxes paid from 1995 through 1999, rather than a partial refund in an amount sufficient to remedy any hypothetical discrimination. The trial court found that the measure of refund was definitively stated in General Motors Corp. v. City and County of San Francisco, to be a full refund of all taxes paid. We disagree.

Before the internal consistency test was applied to determine whether a state or local tax was legal, the rule was that a taxpayer was required to "show more than the possibility of erratic or unconstitutional application. `One who attacks a formula of apportionment carries a distinct burden of showing by "clear and cogent evidence" that it results in extraterritorial values being taxed.' [Citations.]" (City of Los Angeles v. Shell Oil Co., supra, 4 Cal.3d at p. 126, 93 Cal.Rptr. 1, 480 P.2d 953.) The taxpayer thus had the burden of showing the taxing authority actually taxed business activity outside its jurisdiction. (Ibid.) But the taxpayer no longer has to "show more than the possibility of erratic or unconstitutional application" to prove a tax is illegal. As the internal consistency test "asks nothing about the degree of economic reality reflected by the tax," (Oklahoma Tax Comm'n v. Jefferson Lines, Inc., supra, ...